Latest Cato Research on Trade PoliticsIndividual Liberty, Free Markets, and Peacehttp://www.cato.org/
enamast@cato.org (Andrew Mast)webmaster@cato.org (Cato Webmaster)Wed, 29 Jul 2015 11:37:59 -0400Wed, 29 Jul 2015 11:43:56 -0400Demonizing Foreign Investors for the Sins of U.S. Tax Policy Is as Dangerous as It Is Absurdhttp://www.cato.org/publications/commentary/demonizing-foreign-investors-sins-us-tax-policy-dangerous-it-absurd
Daniel J. Ikenson
<p>Blaming foreigners for homegrown economic woes is a tradition of sorts in Washington. In recent years, the favored scapegoat has been China and its folkloric trade indiscretions. But, lately, some have taken to demonizing foreign companies for the sins of a broken U.S. corporate tax system. Given the importance of foreign multinationals and their U.S. affiliates to the U.S. economy, let’s hope policymakers don’t do anything we’ll regret.</p>
<p>U.S. corporate tax policy is punitive, especially toward U.S. companies. U.S. multinationals are subject to double taxation—first at local tax rates in the foreign countries where they operate and then by the Internal Revenue Service at up to 35 percent (the highest rate among the world’s 34 richest economies), when profits are brought home. Foreign multinationals are subject to lower tax rates at home than in the United States, and the profits they earn abroad generally are not taxed a second time.</p>
<p>The U.S. tax system compels U.S. companies to devote as much attention to tax avoidance as they do to pursuing genuine market opportunities. Keeping profits offshore, instead of repatriating them, is the most common form of tax avoidance for U.S. multinationals. Current estimates value those resources at $2 trillion, which represents a large opportunity cost to the U.S. economy.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Given the importance of foreign multinationals and their U.S. affiliates to the U.S. economy, let’s hope policymakers don’t do anything we’ll regret.”</span></p>
</blockquote>
<p>Over the past couple of years, there were several high-profile transactions where U.S. companies acquired foreign companies and then reestablished the entity as foreign-headquartered to reduce their tax burdens. It’s not difficult to see how the broken tax code would encourage these kinds of reorganizations. However, concern over declining tax revenues caused the U.S. Treasury Department to impose new restrictions last year on these so-called corporate inversions, which have subsequently declined in popularity.</p>
<p>Now some are claiming that the Treasury, by impeding inversions, has created a new incentive for foreign acquisitions of U.S. companies. Combined with the advantages that foreign multinationals already have on account of the repatriation tax, which limits the cash available to U.S. multinationals to invest at home, foreign acquisitions should be expected to continue, they argue – to the detriment of the U.S. economy.</p>
<p>Implicit in this argument is the fallacy that outbound investment – the purchases of foreign companies by U.S. companies – is good for the United States and inbound investment, somehow, is not. It considers acquisitions of foreign companies by U.S. companies to be points for Team USA, and acquisitions of U.S. companies by foreign companies to be the other team’s points.</p>
<p>Republican Senator Rob Portman, who is running for reelection in Ohio – a state where the electorate warms to these “Us versus Them” characterizations of trade and investment – seems to share the concern that the tax code advantages foreign-owned businesses. Portman is chairing a committee hearing on July 30 that will “explore the impact of the U.S. corporate tax code on foreign acquisitions of U.S. businesses and the ability of U.S. businesses to expand by acquisition.”</p>
<p>Although foreign multinationals might enjoy some tax advantages by happenstance, they suffer costs, as well. First, by encouraging U.S. multinationals to keep profits abroad, America’s repatriation tax puts more resources in the hands of foreign affiliates of U.S. companies abroad, where they compete for business (and businesses) in the backyards of foreign multinationals. Second, those same high U.S. corporate rates are assessed on the profits of these foreign companies’ U.S. operations.</p>
<p>In fact, U.S. affiliates of foreign companies carry a larger tax burden than the average U.S. private sector company, accounting for 11.8 percent of taxable U.S. corporate income, but paying 13.8 percent of all U.S. corporate income taxes. U.S. affiliates of foreign companies even pay a higher effective tax rate than the U.S. private sector average: 26.9 percent versus 22.9 percent.</p>
<p>When U.S. companies invest abroad, it is those companies – their management, workers, and shareholders – that benefit. Of course those benefits trigger domestic economic activity, create jobs at home, and expand the tax base, too. But relative to inward investment, the benefits of outward investment accrue to the U.S. economy more slowly and through narrower channels.</p>
<p>The U.S. economy benefits more – and more directly – from foreign investment in the United States. Foreign acquisitions of U.S. companies, like “greenfield” investment, spark domestic supply chain activity, lead to more capital investment and more research and development spending, create higher paying jobs, introduce best business practices, and expand the tax base. Numerous studies in recent years – from academia, think tanks, and various business groups – show how the U.S. economy benefits from foreign acquisitions of U.S. companies.</p>
<p>A detailed study published by the Organization for International Investment presents extensive evidence that U.S. subsidiaries of foreign-headquartered companies (U.S. “affiliates”) have had an overwhelmingly positive effect on the U.S. economy – and on other U.S. companies. Between 2001 and 2010, overall U.S. private-sector GDP increased by 39 percent, which was boosted by the 56 percent GDP increase experienced by affiliates. Over the decade, affiliates increased their U.S. stock of property, plant, and equipment by 46 percent – double the overall private-sector rate of increase.</p>
<p>Even though affiliates account for less than 0.5 percent of all U.S. companies with payrolls, they punch well above their weight, accounting for: 5.9 percent of private-sector value added; 5.4 percent of private-sector employment; 11.7 percent of new private-sector, non-residential capital investment, and; 15.2 percent of private-sector research and development spending. They earn 48.7 percent more revenue from their fixed capital and compensate their employees at a 22.0 percent premium to the U.S. private sector average.</p>
<p>Affiliates raise average U.S. economic performance by boosting output, sales revenue, exports, employment, and compensation. They demonstrate stronger than average long-term commitments to operating in the United States with rising levels of capital investment, reinvested profits, research and development spending, and cultivation of relationships with U.S. suppliers. Moreover, U.S. companies benefit from exposure to the best practices employed by affiliates, many of which are world-class companies that succeeded in their home markets and have what it takes to succeed abroad. Competitive jolts, technology spillovers, and the hybridization and evolution of ideas are all difficult-to-quantify benefits of the infusion of foreign direct investment.</p>
<p>The problem is that some U.S. policymakers inadequately grasp that we live in a globalized economy, where the United States is competing with other countries to attract investment in domestic value-added activities. Employers looking to build or buy production facilities, research centers, biotechnology laboratories, hotels, and shopping malls consider a multitude of factors, including size of the market, access to appropriately skilled workers, ease of customs procedures, condition of transportation infrastructure, legal and business transparency, and the burdens of regulatory compliance and taxes, to name a few. Globalization means that public policies – including tax policies – are on trial.</p>
<p>While an overhaul of the tax code would be welcomed by both foreign- and U.S.-based multinationals, one-off “reforms” designed to reduce the number of foreign acquisitions would only drive badly needed investment away at great cost to the U.S. economy and its workforce.</p>
http://www.cato.org/publications/commentary/demonizing-foreign-investors-sins-us-tax-policy-dangerous-it-absurdWed, 29 Jul 2015 11:25 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonTrump's Real Problemhttp://www.cato.org/publications/commentary/trumps-real-problem
David Boaz
<p>Donald Trump has shot to the top of Republican presidential polls on the strength of his celebrity and his bombastic talk.</p>
<p>Elites on all sides of the political spectrum — liberals, conservatives, and libertarians — are horrified by his ranting about Mexican “rapists.” And he may have shot himself in the foot with his comments about Senator John McCain. But his poll numbers are still up there.</p>
<p>Some voters like his tough talk about illegal immigration. But I think more just prefer businessmen to politicians. Nineteen percent voted for billionaire Ross Perot in 1992, against George Bush and Bill Clinton, even after Perot temporarily withdrew from the race on the very odd grounds that the Bush campaign was trying to disrupt his daughter’s wedding.</p>
<p>Voters sense that businesspeople deal in reality, not rhetoric. They get things done. That’s why there’s always a yearning from someone from outside politics to come in and clean up government.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Unfortunately, just because a businessman understands making deals and building hotels doesn’t mean he understands economics.”</span></p>
</blockquote>
<p>The website ThinkProgress talked to three Trump voters at the Family Leadership Summit in Iowa, all of whom emphasized that point. “I just think we need a business man to run the country like a business,” Jim Nelle, a small business owner from Winterset, Iowa, said. David Brown, a farmer and investor from New Virginia, Iowa, noted, “We’re not broke, we’re $19 trillion past broke and I believe that he has the business acumen and wisdom to bring the nation back.” And Bill Raine of New Hampton put it simply: “He’s a businessman, he’s not a politician.”</p>
<p>Unfortunately, just because a businessman understands making deals and building hotels doesn’t mean he understands economics. Trump is definitely an example of that.</p>
<p>What he’s really offering is a mixture of nationalism and protectionist economics along with the promise that he’s the guy, the man on a white horse, who can ride into Washington and fix the mess. He dismisses politicians, other candidates, and American negotiators as “stupid people,” “incompetent people,” and “losers.” He boasts of his wealth and promises that he would “kick [the] ass” of El Chapo, the Mexican drug cartel leader who escaped from prison.</p>
<p>Look at his major issues. He’s been barnstorming the country talking about crime by Mexican immigrants, starting with his claim in his announcement speech that “they’re bringing drugs, they’re bringing crime, they’re rapists.” But there’s no evidence for this. Immigrants are about half as likely to be incarcerated as native-born Americans (men aged 18-39 in both cases), and as the number of legal and illegal immigrants rose in the United States between 1990 and 2010, the rates of violent and property crime fell.</p>
<p>You’d think Mr. Trump would be more sympathetic to immigration. His mother was born in Scotland. His grandfather Trump was born in Germany. His first wife Ivana was born in Czechoslovakia, his current wife Melania was born in Yugoslavia. A genealogist writes on About.com, “Donald Trump epitomizes the American immigrant experience.”</p>
<p>Mr. Trump also doesn’t much like free trade. He regularly rails that “China is taking all our jobs.” He laments that we have “thousands of cars, millions of cars coming in…They send cars, we send corn.” Which actually sounds like a pretty good trade.</p>
<p>At his recent FreedomFest speech he complained about call centers in India, asking, “How can it be that far away and they save money?”</p>
<p>No real businessman would ask such a question. If it weren’t cheaper, businesses wouldn’t do it. Labor is expensive in the United States, cheaper in India and China. So jobs that can be done in cheaper locations are done there, and Americans move into higher-value, higher-paying jobs. The average American wage is now $25 per hour. Employees in Indian call centers make about $2 per hour, a good wage in India but not one that many Americans are looking for.</p>
<p>Mr. Trump doesn’t draw on economics to defend his trade position. It’s all about him, the Donald, just being richer and smarter than the politicians: “Free trade is terrible. Free trade can be wonderful if you have smart people. But we have stupid people. Our trade deals have been made by incompetent people.” He, on the other hand, will “make great trade deals.” But deals have to be good for both sides. He knows that when he builds a building. But he wants voters to believe that he can just bludgeon China or Japan into … what? Not sending us cars? Not letting us outsource low-value labor to low-cost workers? He’d be hard-pressed to find any professional economist, Democrat or Republican, to serve in an administration based on such nonsense.</p>
<p>This “all about me” approach extends to most issues. The deficit? He’s promised to end the corporate income tax, cut individual taxes, and cut spending — but without cutting the biggest programs. How will that work? “I am going to save Social Security without any cuts. I know where to get the money from. Nobody else does.”</p>
<p>I could get behind the idea of a businessman instead of a politician. But not this businessman, who offers only insults, secret plans, and a promise to kick everybody else’s ass.</p>
http://www.cato.org/publications/commentary/trumps-real-problemWed, 22 Jul 2015 12:31 EDTLatest Cato Research on Trade PoliticsDavid BoazThe U.S. Trade Agenda through 2016: From TPA to TPP, TTIP, and Beyondhttp://www.cato.org/multimedia/events/us-trade-agenda-through-2016-tpa-tpp-ttip-beyond
Daniel J. Ikenson, Caleb O. Brown
<p>After a long fight on Capitol Hill that featured hyperbole, demagoguery, and strange political alliances, President Obama signed the Trade Promotion Authority (TPA) into law on June 29, giving him fast-track trade authority and paving the way to finish negotiating the Trans-Pacific Partnership (TPP). The end game may now be in sight for the TPP, which would reduce tariffs and other barriers to trade in goods and services between 12 countries on four continents. Whether TPP will be completed and successfully implemented remains uncertain, but the recent passage of the TPA ensures the process will unfold in the midst of primary election season and that trade policy will be a key 2016 campaign issue.</p>
<p>What is the likelihood of TPP’s passage during the final 18 months of the Obama presidency? How will TPP expand our economic liberties? What are its downsides? And what is the status of the transatlantic trade negotiations? Dan Ikenson, director of the Herbert A. Stiefel Center for Trade Policy Studies, will join us to comment, take your questions, and discuss his efforts to promote free trade.</p>
http://www.cato.org/multimedia/events/us-trade-agenda-through-2016-tpa-tpp-ttip-beyondTue, 21 Jul 2015 12:46 EDTLatest Cato Research on Trade PoliticsDaniel J. Ikenson, Caleb O. BrownSovereign Patent Funds — A New Issue at the Nexus of International Trade and Intellectual Propertyhttp://www.cato.org/multimedia/events/sovereign-patent-funds-new-issue-nexus-international-trade-intellectual-property
K. William Watson
<p>As U.S. policymakers debate how best to deal with the problem of abusive patent litigation, some other governments have decided to fight fire with fire by creating state-owned patent assertion entities. The phenomenon deserves more attention from policymakers in Washington, who are bound to play an important role in shaping international rules to regulate these government “patent trolls.” Known formally as sovereign patent funds, these public-private entities amass large patent portfolios they can use to help domestic companies—sometimes through litigation against foreign competitors. Is this policy a reasonable response to the difficulties many companies face managing patents in a global economy, or is it merely a new form of protectionist industrial policy? Come hear our expert panel discuss the peculiar complexities of this emerging issue.</p>http://www.cato.org/multimedia/events/sovereign-patent-funds-new-issue-nexus-international-trade-intellectual-propertyThu, 09 Jul 2015 12:00 EDTLatest Cato Research on Trade PoliticsK. William WatsonBoost Support for TPP by Rethinking ISDShttp://www.cato.org/publications/commentary/boost-support-tpp-rethinking-isds
Daniel R. Pearson
<p>President Obama’s approach to trade policy has not been particularly adroit. After running for office as a protectionist, he later decided to support freer trade, but never found a way to explain that shift to most of the Democratic Party. Passage of trade promotion authority (TPA) under difficult circumstances allows the administration to conclude the Trans-Pacific Partnership (TPP), but congressional approval of that pact should not be taken for granted. </p>
<p>This is not a time for hubris. Rather, serious efforts should be made to address TPP concerns that have been raised by reasonable critics. One of the most contentious provisions is “investor-state dispute settlement,” or ISDS. The president should act decisively to boost support for TPP by eliminating or modifying ISDS. </p>
<p>ISDS provisions are intended to encourage companies to invest overseas. They provide international arbitration mechanisms that allow foreign investors to sue governments for compensation. The original idea was to prevent discrimination against foreign-owned businesses and to provide financial recourse when governments expropriate property. Recent ISDS agreements also have authorized arbitration at times when governments have not granted treatment that is “fair and equitable.” That rather vague standard has opened the door for creative attorneys to file a rapidly rising number of arbitration cases. The United States has never lost an ISDS arbitration case, but seems certain to do so eventually. Such a loss runs the risk of further diminishing public support for trade agreements.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">The president should undergird congressional support for his trade agenda by rethinking ISDS promptly before TPP talks conclude.”</span></p>
</blockquote>
<p>Opponents, including Sen. Elizabeth Warren (D-Mass.), argue that ISDS provides foreign investors with the ability to challenge government measures intended to regulate labor, the environment, and financial markets. Some of the scare tactics used by left-leaning adversaries of international economic integration have been outlandish, serving to dumb down what ought to be a thoughtful debate on the merits of the agreement. Nothing in ISDS appears likely to lead to poisoning of the U.S. food supply, for instance, yet such claims have seriously undermined public support for ISDS and for TPP itself. More legitimate criticisms of ISDS include that it provides special legal rights for investors from overseas — rights not shared by domestic firms — to file arbitration cases against governments in the United States, and that ISDS does nothing to enhance trade liberalization.</p>
<p>Supporters of ISDS, which includes most of the U.S. business community, argue that being able to pursue claims against unfair treatment by governments makes firms more willing to invest. Although the evidence is inconclusive, this may lead to greater economic growth and increased prosperity, while providing an incentive for good governance. There are thought to be several thousand ISDS agreements in force. They may have played a role in boosting cross-border economic integration and global supply chain efficiency. </p>
<p>True, cross-border investors would prefer that TPP include ISDS. But most U.S. companies understand that the real benefits of TPP would come from reforms that reduce barriers to trade in goods and services, as well as making foreign investment possible by opening up previously closed sectors of the economy. If there are no ISDS provisions in TPP, companies have other approaches to risk management: adding arbitration clauses to contracts; purchasing political risk insurance; or simply investing somewhere safer. It’s worth noting that there is no ISDS agreement between the United States and China, for instance, yet a large number of U.S. firms have invested there. No ISDS provision was included in the U.S.-Australia FTA, yet its passage was strongly supported by the business community. The same would be true for TPP even in the absence of ISDS.</p>
<p>Could Obama cultivate additional votes for TPP among Democratic members of Congress by addressing ISDS concerns? First he would have to persuade other TPP nations to adjust or eliminate ISDS fairly late in the negotiating process. Since the United States has been the strongest proponent of including such a measure, the president may be able to get other countries to agree. Removing ISDS would be the simplest and quickest alternative. However, if realities dictate that some ISDS provision must be retained, the wording should be tightened to remove — at a minimum — the fair-and-equitable-treatment language. Such a change would strengthen the coalition in favor of TPP by showing that the president has been listening to his critics, especially those who want him to succeed.</p>
<p>Taking a proactive approach to fixing ISDS would address a problem that has the potential to torpedo TPP in Congress. This may be the most practical step the administration could take to enhance the prospects for TPP among Democrats, while likely costing no Republican votes. The president should undergird congressional support for his trade agenda by rethinking ISDS promptly before TPP talks conclude.</p>
http://www.cato.org/publications/commentary/boost-support-tpp-rethinking-isdsWed, 08 Jul 2015 10:45 EDTLatest Cato Research on Trade PoliticsDaniel R. PearsonImports Are Why We Want More Tradehttp://www.cato.org/publications/commentary/imports-are-why-we-want-more-trade
David Boaz
<p>Sen. Orrin Hatch, R–Utah, author of the recently passed Trade Promotion Authority bill, makes the usual case for trade agreements and TPA:</p>
<p>“We need to get this bill passed. We need to pass it for the American workers who want good, high-paying jobs. We need to pass it for our farmers, ranchers, manufacturers, and entrepreneurs who need access to foreign markets in order to compete.”</p>
<p>Hatch is as confused as most Washingtonians about the actual case for free trade.</p>
<p>This whole “exports and jobs” framework is misguided. In the Cato Journal, economist Ronald Krieger explained the difference between the economist’s and the non-economist’s views of trade. The economist believes that “the purpose of economic activity is to enhance the wellbeing of individual consumers and households.” And that “imports are the benefit for which exports are the cost.” Imports are the things we want—clothing, televisions, cars, software, ideas—and exports are what we have to trade in order to get them.</p>
<p>And thus: “The objective of foreign trade is therefore to get goods on advantageous terms.” That is why we want free—or at least freer—trade: to remove the impediments that prevent people from finding the best ways to satisfy their wants. Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">This whole ‘exports and jobs’ framework is misguided.”</span></p>
</blockquote>
<p>Hatch isn’t alone in missing this point. President Barack Obama’s official statement on “Promoting U.S. Jobs by Increasing Trade and Exports” mentions exports more than 40 times; imports, not once. Sen. Rob Portman, R-Ohio, a former U.S. trade representative, says that a trade agreement “is vital to increasing American exports.”</p>
<p>If Saudi Arabia would give us oil for free, or if South Korea would give us televisions for free, Americans would be better off. The people and capital used to produce televisions—or produce things that were traded for televisions—could then shift to producing other goods.</p>
<p>Unfortunately for us, we don’t get those goods from other countries for free.</p>
<p>Sometimes international trade is seen in terms of competition between nations. We should view it, instead, like domestic trade, as a form of cooperation. By trading, people in both countries can prosper. Goods are produced by individuals and businesses, not by nation-states. “South Korea” doesn’t produce televisions; “the United States” doesn’t produce the world’s most popular entertainment. Individuals, organized into partnerships and corporations in each country, produce and exchange.</p>
<p>In any case, today’s economy is so globally integrated that it’s not clear even what a “Japanese” or “Dutch” company is. If Apple Inc. produces iPads in China and sells them in Europe, which “country” is racking up points on the international scoreboard? The immediate winners would seem to be investors and engineers in the United States, workers in China, and consumers in Europe; but of course the broader benefits of international trade will accrue to investors, workers, and consumers in all those areas.</p>
<p>The benefit of international trade to consumers is clear: We can buy goods produced in other countries if we find them better or cheaper. There are other benefits as well. First, it allows the division of labor to work on a broader scale, enabling the people in each country to produce the goods at which they have a comparative advantage. As the economist Ludwig von Mises put it, “The inhabitants of [Switzerland] prefer to manufacture watches instead of growing wheat. Watchmaking is for them the cheapest way to acquire wheat. On the other hand the growing of wheat is the cheapest way for the Canadian farmer to acquire watches.”</p>
http://www.cato.org/publications/commentary/imports-are-why-we-want-more-tradeFri, 03 Jul 2015 09:12 EDTLatest Cato Research on Trade PoliticsDavid BoazExport-Import Bank Closes: Kill Subsidies to Cut Federal Liabilities, Promote Economic Fairnesshttp://www.cato.org/publications/commentary/export-import-bank-closes-kill-subsidies-cut-federal-liabilities-promote
Doug Bandow
<p>The Export-Import Bank dies tonight when its charter expires. After 81 years, what is commonly known as Boeing’s Bank is headed toward Washington’s trash bin.</p>
<p>When Congress returns it could revive Ex-Im, which primarily subsidizes big business exports. But a proper burial for what Barack Obama once called “corporate welfare” would save Americans money, reduce economic injustice, and promote economic growth.</p>
<p>The Bank was established in 1934 to promote trade with the Soviet Union, ExIm now is one of a score of federal agencies tasked with encouraging exports. The agency exists to borrow at government rates to provide credit at less than market rates for select exporters, mostly corporate behemoths.</p>
<p>ExIm claims to be friendly to small business, but cherchez the money: it goes to Big Business. According to Veronique de Rugy of the Mercatus Center, between 2007 and 2013 the Bank subsidized $66.7 billion in sales by Boeing. ExIm also underwrote $8.3 billion for General Electric, $5.2 billion for Bechtel, $4.9 billion for Caterpillar and its subsidiary Solar Turbine, $3.2 billion for CBI Americas, $3.0 for Exxon Mobil, $2.1 billion for Applied Materials, $2.0 billion for Westinghouse, and $1.4 billion for Noble Drilling. During that period Boeing enjoyed 35 percent, GE 4.4 percent, and Bechtel 2.7 percent of the Bank’s largesse.</p>
<p>In 2012, noted Timothy Carney of the <em>Washington Examiner</em>, the aircraft maker accounted for <em>83 percent</em> of all loan guarantees. The following year just five firms collected 93 percent of the loan guarantees. Also in 2013 the top ten ExIm beneficiaries accounted for two-thirds of the Bank’s total activities: Boeing, General Electric, Bechtel, Applied Materials, Caterpillar, Space Systems/Loral, Komatsu America, Case New Holland, Ford, and Sikorsky Aircraft. Other frequent beneficiaries include Dow Chemical, John Deere, and Lockheed Martin.</p>
<p>Giants of the financial world, such as Citibank and JP Morgan Chase, also do well by the Bank. Loren Thompson of the Lexington Institute thought he was arguing in favor of ExIm when he observed: “Private lenders often don’t like the risk profile of countries seeking export assistance” and “want the kind of protections available to lenders who finance the exports of other countries.” Of course they do. But the U.S. government’s role is not to protect profit-making private firms from risks at home or abroad.</p>
<p>The Bank denies providing subsidies since it charges fees and interest and claims to make a “profit”—more than $1.6 billion since 2008. But if ExIm operated like a normal commercial bank there would be no need for it. Anyway, economists Jason Delisle and Christopher Papagianis explained that the Bank’s “profits are almost surely an accounting illusion” because “the government’s official accounting rules effectively force budget analysts to understate the cost of loan programs like those managed by the Ex-Im Bank.” Most important, there is no calculation for market risk. Including that would provide “a more comprehensive measure of federal costs” concluded the Congressional Budget Office.</p>
<p>Alas, politicians understandably hate accurate assessments of costs. Delisle and Papagianis estimate counting everything would make ExIm’s actual expense more than $200 million a year. CBO comes to a similar conclusion, figuring real losses over the coming decade likely to exceed $2 billion. However, this might be on the low side. Federal Reserve economist John H. Boyd also looked at the “<em>opportunity cost</em>, a payment to taxpayers for investing their funds in this agency rather than somewhere else.” He estimated that the Bank’s real cost averaged around $200 million annually in the late 1970s and rose to between $521 million and $653 million by 1980.</p>
<p>If the financial markets get ugly again—witness the ongoing global shock waves from <em>le affaire</em> Greece—taxpayers could get hit with a big default bill. Total outstanding credit is $110 billion, yet the agency’s own inspector general warned that Bank practices create the risk of “severe portfolio losses.”</p>
<p>The agency is supposed to create jobs by throwing cheap money at purchasers of American products. However, if business subsidies are the way to prosperity, why stop with exporters? More business handouts generally would mean more deals and jobs. Underwriting domestic producers would have the added advantage of keeping all the economic benefits at home. The higher the subsidy, the more jobs would be created. If government paid the entire bill, the benefits should be infinite.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">ExIm’s closure is a very rare victory for the good guys in Washington.”</span></p>
</blockquote>
<p>Well, no.</p>
<p>First, the Bank backs only about two percent of U.S. exports. That’s not enough to redress the trade deficit, which Thompson cited as an argument for ExIm. The Bank simply doesn’t matter much in an $18 trillion economy.</p>
<p>Moreover, there is plenty of private money available for trade deals. A Goldman Sachs analysis last year predicted that the impact of a Bank closure “would be fairly limited given the robust financing environment at present.” Even Boeing CFO Kostya Zolotusky went off-message two years ago when he indicated his confidence that buyers would find “alternative funding sources” if the Bank closed. No doubt foreign buyers prefer that Uncle Sam bankroll American companies, but the U.S. was a major exporter before the Bank was created and will remain so long after the Bank is gone.</p>
<p>Indeed, subsidies do not correlate with exports. Overall commercial flows largely reflect macroeconomic factors and international competitiveness. My Cato Institute colleague Sallie James found that since 2000 “Germany and the United States, historically two of the smallest users of export credit programs, had the highest export growth in absolute terms out of the rich countries.” Reforming capital gains and corporate tax rates, and rationalizing regulation would do more to aid exporters. So would dropping economic sanctions which Washington uses so prolifically but often ineffectively against a host of nations.</p>
<p>Second, no one knows which deals are sealed only with ExIm funding. A host of factors affect any purchase decision, starting with price and quality. One study of aircraft sales, heavily subsidized by what has been called “Boeing’s Bank,” rated financing as only eighth out of twelve factors. Often purchasers would have bought anyway, but everyone in the process has an incentive to claim that ExIm assistance was vital.</p>
<p>Years ago Congress barred the Bank from participating in sales involving China’s environmentally-destructive Three Gorges Dam. ExIm President Martin Kamarck told corporate America not to worry: “This decision does not in any way limit or impede U.S. companies from doing business in the Three Gorges project on private terms and with financing from other sources. Already, several U.S. companies have sold between $60 million and $100 million worth of equipment and services to this project without ExIm Bank support.”</p>
<p>Third, even when a deal is sealed with federal backing, all that we know is that the buyer chose a subsidized American product over one or more alternatives—including unsubsidized American products. The Bank does not aid against foreign competition but against <em>all</em> competition, including other U.S. concerns. In that case the jobs gained by one company might be lost by another. Years ago CBO acknowledged that subsidies increased jobs in favored industries but only “at the expense of non-subsidized industries.”</p>
<p>Fourth, the Bank underwrites foreign companies which compete against U.S. concerns. ExIm isn’t supposed to make deals causing “substantial injury” to American companies, but the Bank polices itself. The most obvious problem comes from subsidies for direct rivals of U.S. concerns, almost always the case with Boeing aircraft sales, for instance.American miners objected to agency backing for an Australian iron mine. U.S. financial institutions which concentrate on international transactions, such as American International Group and DC Factoring, also compete with ExIm and private financial firms backed by the Bank.</p>
<p>That’s not all, however. Many U.S. companies effectively pay to subsidize a few exporters. My Cato Institute colleague Dan Ikenson estimated that the agency’s activities were equivalent to an annual tax of $2.8 billion on U.S. competitors of both domestic exporters and foreign consumers. He explained: “for nearly every ExIm financing authorization that might advance the fortunes of a single U.S. company, there is at least one U.S. industry—and often dozens or scores of industries—whose firms are adversely impacted because supply is being diverted, market power is being shifted, and the cost of capital is being lowered for their foreign competition.”</p>
<p>Fifth, if government subsidies really create jobs and wealth, it would be better to keep the money at home, underwriting American rather than foreign buyers. Then U.S. citizens would benefit on both sides of the commercial equation. As AEI economist Michael Strain testified on Capitol Hill, “even if the Congress chooses to offer financing to selected sectors to support employment, exports would not be high on the list of firms or industries to target.” Economists would recommend different beneficiaries.</p>
<p>Sixth, as Nobel Laureate Milton Friedman once observed, there ain’t no such thing as a free lunch. The government can’t create wealth <em>ex nihilo</em>. Unless the money being lent was a gift—perhaps from some oil-rich sheikh—it had to come from other Americans. If those resources didn’t go to ExIm’s lucky clients, they would have gone to someone else. Thus, the unsubsidized someone else produces and sells fewer goods and services, and creates fewer jobs. Moreover, explained de Rugy, “capital market distortions have ripple effects. Subsidized projects attract more private capital while other worthy projects are overlooked. The subsidized get richer while the unsubsidized get poorer—or go out of business.”</p>
<p>Moreover, increasing purchases of exporters’ products increases their demand for goods and services, raising the price to other American firms. Shifting resources to export firms also reduces domestic production, raising prices in those industries. As Strain testified, this puts companies in unsubsidized industries at a disadvantage.</p>
<p>The Bank’s most important flaw is that it redirects rather than creates economic activity. This is common sense as well as basic economics. For instance, the World Bank’s Heywood Fleisig and Catharine Hill warned that devoting scarce financial resources to export promotion cuts “domestic investment, consumption, or government expenditure.” Such subsidies only increase export-related employment “at the expense of employment elsewhere.” No one knows the exact trade-off, which likely varies depending on economic conditions. Years ago University of Arizona economist Herbert Kaufman figured that $1 billion in federal loan guarantees eliminated between $736 million and $1.32 billion in private financial activity.</p>
<p>Government economists have made the same point. Shayerah Ilias with the Congressional Research Service concluded that export subsidies perform “poorly as a jobs creation mechanism” because they don’t raise employment levels, but instead merely alter “the composition of employment among the various sectors of the economy.” The Government Accounting Office’s JayEtta Hecker similarly testified that “government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy.” Thus, ExIm claims of jobs created “may not represent net job gains.”</p>
<p>Is there any other argument for ExIm? The expansion of global capital markets puts the lie to the contention that there is a “market failure” in providing export financing. The mere fact someone somewhere said no to a deal is not a “market failure.” Most international commerce is privately financed. The Bank’s foreign clients are mostly prosperous participants in the global marketplace with many other potential sources of funds.</p>
<p>The best argument for ExIm is that there are 59 foreign credit subsidy agencies like the Bank, though most are smaller. But “everyone else does it” never is a good reason to do something stupid. Foreign subsidies play only a small role in global commerce. As noted earlier, just two percent of export transactions are backed by the Bank. Of those, between 2002 and 2010 ExIm tagged less than 40 percent as necessary to “meet competition.” That number certainly is too high, since the seller and Bank both want to justify more subsidized-credit. Against any lost business from foreign subsidies must be balanced the lost business of companies harmed by ExIm’s activities.</p>
<p>Proving that Samuel Johnson was correct when he said patriotism was the last refuge of the scoundrel, a gaggle of former national security officials called the Bank a “critical element” of U.S. security. The Senate’s advocates of constant war, John McCain and Lindsey Graham, also back ExIm as a tool of American foreign policy. Retired Gen. James Jones warned that killing the Bank would result in “a less stable and secure world.” David Petraeus, one-time military commander and CIA director, and Michael O’Hanlon of the Brookings Institution, contended that the Bank strengthens America’s declining manufacturing base, which is critical for the nation’s international position. Conservative blogger and radio commentator Hugh Hewitt called the Bank “Soft power at its best.”</p>
<p>But the interests of particular exporters are not the same as of all Americans. The U.S. economy, not a federal agency, is real soft power. And the economy is not strengthened by allowing politicians to redirect resources for political reasons. Ikenson warned Congress that ExIm penalizes newer, more dynamic firms in a process that “undermines the strength of the U.S. economy, which is crucial to reaching U.S. security and foreign policy goals going forward.”</p>
<p>Thompson complained that even with the Bank the U.S. was losing ground economically to China, yet last year, noted Carney, the biggest recipient of ExIm largesse was <em>China</em>, America’s most important geopolitical competitor! Russia, with whom the U.S. is involved in a bitter confrontation over Ukraine, was number five. Some of the foreign firms benefited have exported arms and nuclear technology, contrary to U.S. policy. The Bank even subsidies the foreign export agencies used to justify the agency’s existence. Explained Carney: “The largest foreign companies and banks all get subsidies from U.S. ExIm, and China’s ExIm gets direct subsidies from U.S. ExIm.” If Washington believes it has a geopolitical reason to underwrite a foreign government, it should do so directly, through Defense, State, or U.S. AID, rather than pretend the deal is a commercial transaction.</p>
<p>Nor does the Bank promote Third World development. In the energy field, for instance, Americans have subsidized Brazil’s Petrobras, Mexico’s Pemex, and even Russia’s Gazprom. Alas, explained James: “When the Bank finances public-sector borrowers, it delays privatization and other free-market reforms that would aid economic development.” De Rugy noted that ExIm also has inflated the debts of half of the countries listed as Heavily Indebted Poor Countries by the World Bank and IMF.</p>
<p>Finally, export subsidies have a more basic, debilitating political effect: encouraging more companies to engage in what economists call “rent-seeking,” using government to extract rather than create wealth. Complained Chris Rufer, founder of The Morning Star Co.: “I have observed too many of my fellow business leaders blatantly work with the government to increase their profits at taxpayer expense.” The Chamber of Commerce and National Association of Manufacturers launched major lobbying campaigns for what can rightly be described as corporate welfare. The U.S. has sacrificed its republican roots for spoiled corporatist fruit.</p>
<p>Should the U.S. help American exporters? Absolutely. Encourage free trade. Roll back economic sanctions. Adopt responsible budget policies. Lower and simplify the corporate income tax. Cut regulations on business. Stop subsidizing the defense of prosperous trade competitors. But don’t turn the U.S. Treasury into a source of corporate welfare.</p>
<p>ExIm’s closure is a very rare victory for the good guys in Washington. Crony capitalism is running rampant in America, undermining confidence in a market economy. As usual, the capitalists are proving to be the greatest enemies of capitalism, with many businesses trekking to Washington seeking handouts. Although the Bank’s Lazarus-like return can’t be ruled out, tomorrow Boeing and the rest of America’s corporate elite will enjoy one less special privilege at everyone else’s expense. One down. Hundreds more special interest subsidies to go.</p>
http://www.cato.org/publications/commentary/export-import-bank-closes-kill-subsidies-cut-federal-liabilities-promoteTue, 30 Jun 2015 10:43 EDTLatest Cato Research on Trade PoliticsDoug BandowK. William Watson discusses the fast-track trade agreement on Democracy Now!http://www.cato.org/multimedia/media-highlights-tv/k-william-watson-discusses-fast-track-trade-agreement-democracy-now
http://www.cato.org/multimedia/media-highlights-tv/k-william-watson-discusses-fast-track-trade-agreement-democracy-nowWed, 24 Jun 2015 10:21 EDTLatest Cato Research on Trade PoliticsK. William WatsonOhio Sen. Sherrod Brown cites Brink Lindsey's Trade Briefing "Job Losses and Trade: A Reality Check" on C-SPAN 2http://www.cato.org/multimedia/media-highlights-tv/ohio-sen-sherrod-brown-cites-brink-lindseys-trade-briefing-job-losses
http://www.cato.org/multimedia/media-highlights-tv/ohio-sen-sherrod-brown-cites-brink-lindseys-trade-briefing-job-lossesTue, 23 Jun 2015 13:40 EDTLatest Cato Research on Trade PoliticsBrink LindseySimon Lester discusses trade policy in Congress on KNUS's Kelley & Companyhttp://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-trade-policy-congress-knuss-kelley-company
http://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-trade-policy-congress-knuss-kelley-companyMon, 15 Jun 2015 11:26 EDTLatest Cato Research on Trade PoliticsSimon LesterTrade Promotion Authority and the Trans-Pacific Partnership: What Lies Ahead?http://www.cato.org/publications/free-trade-bulletin/trade-promotion-authority-trans-pacific-partnership-what-lies-ahead
Daniel J. Ikenson
<p><strong>Introduction</strong><br />
On May 22, 2015, the U.S. Senate passed the Bipartisan Congressional Trade Priorities and Accountability Act, better known as Trade Promotion Authority (TPA), by a vote of 62–37. At the same time—and in the same vote—the Senate passed the Trade Adjustment Assistance Enhancement Act (TAA). The bills were passed, respectively, as Title 1 and Title 2 of H.R. 1314, or the “Trade Act of 2015.”<sup>1</sup></p>
<p>In light of what appeared to be formidable opposition, passage of the bill in relatively short order is a credit to the commitment of Majority Leader Mitch McConnell, Finance Committee Chairman Orrin Hatch, and Finance Committee Ranking Member Ron Wyden to getting it done. But the road to securing TPA, finalizing the Trans-Pacific Partnership (TPP), and implementing the agreement remains long and uncertain.</p>
<p>Getting enough votes in the House of Representatives will test the persuasive powers and political acumen of Ways and Means Chairman Paul Ryan, Speaker John Boehner, and President Obama, who need to woo Democratic support without losing Republican support, or vice versa. The numbers are uncertain and subject to change, as House leadership maneuvers to adjust to actions already taken in the Senate. Meanwhile, with progress on TPA, the TPP talks have begun to move into the “end-game” phase. Although it is uncertain how long this phase of the negotiation will last, it is apparent that the soonest Congress could vote to implement the TPP is early 2016, with the distinct and growing possibility that the matter will fall to a lame duck session or to the next president and the 115th Congress.</p>
<p>This bulletin describes the status of TPA and TPP, provides some background, and fleshes out some of the issues that could impact the trade agenda in the weeks and months ahead.</p>
<p><strong>Politics and Schisms</strong><br />
The axiom that trade divides Democrats and unites Republicans helps explain President Obama’s reluctance, over the past six years, to push for Trade Promotion Authority legislation. Although it would have made sense to obtain TPA at the outset of the TPP negotiations, the president was intent on avoiding a fight with—and between—congressional Democrats at that time. He also thought that if he first brought Congress a new kind of trade agreement that fixed every alleged shortcoming in past deals, Democrats would have no bases for objecting to TPA, and the intraparty squabble would be avoided. So he chose to defer the pursuit of TPA.<sup>2</sup></p>
<p>With time running out on his watch, and finally recognizing that finishing TPP would be impossible without a grant of TPA first, the president could defer no longer. As he began to advocate for TPA and the TPP soon after the 2014 elections, a Democratic rift—and possible schism—emerged.<sup>3</sup></p>
<p>At the moment, the president is in lockstep with a large majority of congressional Republicans, who support trade liberalization and see TPA as essential to the process. But some Republicans, who are wary of giving this president any more power, have joined ranks with the vast majority of congressional Democrats in opposition to TPA.<sup>4</sup> Meanwhile, hyperaware of the politics, Democratic presidential frontrunner Hillary Clinton—and potential heir to the trade agenda—has refused to take a position.<sup>5</sup></p>
<p><strong>TPA and TPP in Perspective</strong><br />
Over the past few months, the public has been fed a smorgasbord of hyperbole, misinformation, and subterfuge about both TPA and TPP. The quality of the discourse has at times been appalling. Commentators on the left and the right have described TPA as an executive power grab, a congressional abdication, and an arrangement to enable the president to sneak secretly negotiated provisions into U.S. law.</p>
<p>But TPA is nothing of the sort. It is a compact between the two branches, which essentially deputizes the president to negotiate trade agreements on behalf of Congress. Those agreements must meet parameters and fulfill objectives spelled out by Congress. Before any agreement is put to a vote in Congress, the final details of the agreement are published and made available to the public for a minimum of five months, and possibly as many as nine months. If the concluded trade agreement meets Congress’s parameters and fulfills its objectives, legislation to implement the agreement is considered without amendments on an expedited timetable by an up-or-down vote. If the agreement fails to meet Congress’s parameters or fulfill its objectives, it can be taken off the so-called fast-track through a resolution of disapproval. And, ultimately, members and senators can vote “no” if they don’t like the contents of the agreement.</p>
<p>The TPP is a long-gestating trade negotiation between the United States and 11 other nations.<sup>6</sup> The United States first expressed interest in the TPP in the final year of the George W. Bush administration. But officially joining what was then called the “P4,” changing its name to the Trans-Pacific Partnership, encouraging other countries to join, expanding the coverage of the negotiations, and making it the economic centerpiece of the U.S. “pivot to Asia” was the work of the Obama administration—including Secretary of State Hillary Clinton (an architect, as well as a potential heir).</p>
<p>The TPP would reduce tariffs and other barriers to trade in goods and services between 12 countries on four continents. The final agreement would presumably include 29 chapters with rules governing various aspects of trade and trade-related policies, such as labor standards, environmental standards, government procurement, intellectual property, investment rules, supply chains, state-owned enterprises, and more. The agreement likely would include provisions for the accession of other countries, several of which have already expressed interest in joining. Ultimately, as some TPP architects and other trade-policy watchers have suggested, the TPP could eventually evolve into a larger Free Trade Area of the Asia Pacific.Historically, trade agreements have expanded Americans’ economic liberties, even though that outcome has never been the principal objective. It happens residually. Trade negotiators prioritize the export-oriented goals of their business interests and, in the process of reaching those objectives, make Americans more economically free. The domestic-market access offered to induce foreign-market openings to U.S. exporters is what delivers those benefits to U.S. consumers, taxpayers, and businesses. However, trade agreements also include terms that explicitly protect domestic producers from competition, and those provisions reduce—or at least impede—economic freedom. A final TPP agreement will include terms that are both liberalizing and protectionist, so the answer to the question of whether the agreement should be supported would seem to depend on the specifics of its provisions.<sup>7</sup></p>
<p>Yet, without those specifics available, the TPP has been characterized by detractors as a sellout to multinational corporations that will destroy U.S. manufacturing; ship millions of jobs abroad; create health crises by impeding access to medicines; destroy the globe’s water and air quality; poison the U.S. food supply; gut domestic health, safety, environmental, and banking regulations; and usurp U.S. sovereignty. Meanwhile, proponents assert with equal confidence that TPP will grow the economy, create jobs, reduce trade deficits, reassert U.S. economic leadership, curb China’s unfair economic practices, and ensure greater opportunities by solidifying ties with the world’s most robust economic region.</p>
<p>The TPP has yet to be concluded and only a select few people have access to the draft text of the negotiations, so claims of specific outcomes should be met with skepticism. Indeed, unless one is professionally or ideologically predisposed to supporting or opposing trade agreements regardless of their terms and, thus, regardless of the facts, it is premature to render judgment about the TPP. But render judgment we must.It is broadly understood that the TPP negotiations cannot be concluded without a formal grant of TPA. Without TPA, the president could not be sure that any trade deal struck and brought home for ratification reflected the official wishes of Congress, and the likelihood that foreign negotiators would put their best and final offers on the table—knowing that Congress could unravel the terms—is close to zero. So if there is going to be an honest assessment of the contents of the TPP and an informed debate about its costs and benefits, Congress must pass, and the president must sign into law, TPA legislation first.</p>
<p><strong>Congressional TPA Action</strong><br />
The Senate passed the Trade Act of 2015 by the comfortable margin of 62–37 on May 22, 2015. But getting to that point required some agenda management and deal-making that will impact congressional actions in the weeks ahead.</p>
<p>In late April, the Senate Finance and House Ways and Means Committees conducted markups of four pieces of trade legislation: the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA 2015); the Trade Adjustment Assistance Enhancement Act of 2015 (TAA 2015); the Trade Facilitation and Trade Enforcement Act of 2015 (Customs Reauthorization); and the African Growth and Opportunity Act Extension and Enhancement Act of 2015 (AGOA 2015).</p>
<p>The TPA 2015 would guarantee expedited (“fast track”) congressional consideration of trade deals negotiated by the president that meet congressional objectives and priorities (as described earlier) through July 1, 2018, with extensions possible through July 1, 2022.</p>
<p>The TAA 2015 would expand and extend the Trade Adjustment Assistance program, which is a federal entitlement program that offers training and financial assistance to U.S. workers who claim to have been adversely impacted by imports or outsourcing. The bill authorizes $450 million of annual appropriations through June 30, 2021.</p>
<p>As has been the case historically, the TPA and TAA bills were packaged together as the Trade Act of 2015, a move assumed necessary to permit enough Democrats to support TPA.<sup>8</sup> But there may be stronger opposition to TAA now than ever before, as the program’s purpose, cost, and efficacy are increasingly in doubt among Republicans and many Democrats dislike the fact that the budget offsets come primarily from other entitlement programs.<sup>9</sup></p>
<p>Ultimately, the packaging of TPA and TAA in the Trade Act has created some hurdles for House consideration of the bill. Since most House Republicans support TPA but not TAA, and since most House Democrats support TAA but not TPA, leadership is considering a parliamentary procedure known as “dividing the question,” which would allow members to vote on each title (TPA and TAA) separately. The hope and expectation is that both titles would get enough votes for passage (TPA from most Republicans and some Democrats; TAA from most Democrats and some Republicans) without members being on the record supporting legislation they oppose. This would also avoid the need to have a conference committee reconcile differences between the Senate and House versions of the bill, which would subject the Trade Act to another controversial vote.</p>
<p>More problematic, logistically, is that the Senate TPA bill includes a provision that would deny fast-track consideration of trade agreements between the United States and countries identified as “Tier 3” countries under the Trafficking Victims Protections Act.<sup>10</sup> The provision would seem to imperil the TPP, as Malaysia—a TPP party—is currently classified as a Tier 3 country. Although Senator Robert Menendez (D-NJ), who offered the amendment creating this provision, later sought to modify the language by providing for exemptions in cases where the Secretary of State confirms that the Tier 3 country “has taken concrete actions to implement the principal recommendations in the most recent annual report on trafficking in persons,” the changes never made it into the final bill. To save TPP from fast-track disqualification, then, the trafficking language must be amended somehow.</p>
<p>This problem raises the profile of the Customs Reauthorization bill, which would reauthorize various operations of U.S. Customs and Border Protection and create new rules for enforcing U.S. trade laws. The Senate version includes some controversial language that does not appear in the House version, which will have to be reconciled if the bill is to pass in both chambers. Specifically, the Senate bill includes provisions sponsored by Senator Sherrod Brown (D-OH), which would amend U.S. trade remedy laws in a manner favorable to domestic protection-seekers in antidumping and countervailing duty cases. It also contains an actionable currency manipulation provision.Although the most contentious currency manipulation provision—the so-called Portman-Stabenow Amendment—failed to be adopted as a principal negotiating objective in the Senate TPA bill, the Customs Reauthorization bill includes language that would require the Commerce Department to treat currency manipulation as a subsidy under the U.S. Countervailing Duty law.</p>
<p>The Senate bill also includes language that would reform the Miscellaneous Tariff Bill process—an issue that has divided Republicans in recent years over the question of what constitutes an “earmark,” which the caucus has pledged to oppose. This language could present an obstacle to passage of Customs Reauthorization in the House—but it is less of an obstacle than currency and trade remedies.</p>
<p>With leadership in both chambers averse to conferencing the Trade Act, there has been talk of having the House vote (and pass) the Senate version of the Trade Act, which would be modified retroactively by passage of a Customs Reauthorization bill that would include human trafficking exemption language introduced during a conference to reconcile differences in the House and Senate Customs Reauthorization bills. Though achievable, that strategy is risky, given the possibility that reconciliation of the two versions might fail. That would leave Congress with a TPA bill that is unusable for the TPP, given Malaysia’s Tier 3 status. The less attractive alternative is to conference the TPA bill.</p>
<p>Finally, the idea of amending the Trade Act with a provision to reauthorize the Export-Import Bank was floated, but failed to materialize. However, after Senators Maria Cantwell (D-WA) and Lindsey Graham (R-SC) threatened to vote against the Trade Act without a vote on Ex-Im, Majority Leader McConnell agreed to make room for a vote on Ex-Im’s reauthorization sometime this month. For the moment, the Ex-Im issue has no direct bearing on the outcome of the Trade Act, but it shouldn’t be dismissed as a potential wildcard that could influence the TPA debate this month.</p>
<p><strong>How Soon Can the TPP Negotiations Wrap Up?</strong><br />
With the Trade Act and the Customs Reauthorization bills now under consideration in the House of Representatives, it is likely that TPA will either become law or be rejected by the end of June. If it becomes law, the focus of the trade agenda will shift to wrapping up the TPP. The absence of TPA has been cited often as the main obstacle to concluding TPP, but other potential impediments loom.The final stage of trade negotiations tends to reveal distance where previously agreement had been assumed. It also features unexpected demands that threaten to reverse progress and unravel the whole deal. And it is usually the case that the hardest issues to resolve are shunted to the end. So it is reasonable to assume that a 29-chapter trade agreement negotiated for nearly a decade between 12 countries at different levels of development will generate some sticking points that will take some time to resolve.</p>
<p>What is the status of the Investor-State Dispute Settlement provision? What ever happened to the so-called “tobacco carve-out”? Will the agreement include language that expressly excuses discrimination against tobacco products for purposes of ensuring public health and safety? Will the agreement provide for a single set of tariffs and rules for all countries, or will it amount to a less liberalizing series of bilateral agreements? Will Malaysia be permitted its government procurement preferences for indigenous populations? Will the United States insist on, and other countries submit to, the U.S. process of certification, which conditions entry-into-force of the agreement on the president’s certification that the trade partner’s laws are in compliance with the terms of the agreement? Will Japan, Canada, and the United States open their various agricultural markets enough in Australia’s and New Zealand’s estimations? These and other questions still loom.</p>
<p><strong>Are We There Yet?</strong><br />
According to the timelines established in the TPA bill, if TPA were to become law by June 30 and the TPP were to conclude by July 31, the agreement couldn’t be signed before November 1 because the president is required to give notification of his intention to sign 90 days prior to signing the agreement. The administration would then have as many as 60 days to prepare a list of changes to U.S. laws required by TPP and the U.S. International Trade Commission would have up to 105 days to produce an economic impact assessment. Then, 30 days prior to introducing the deal’s implementing legislation, the administration would be required to publish the final text of the deal. After introduction of the implementing legislation, the House would have to hold a vote within 60 days and the Senate would have to vote no more than 30 days after the House. If the bill is passed by Congress, the president can then sign it into law and implement the agreement by proclamation.</p>
<p>So, if the TPP is signed on November 1 and every subsequent phase in the process is completed by the earliest possible date, the TPP could be implemented by December 1, 2015. But that assumes that the administration and the International Trade Commission have their reports ready to go on the date of signing and that Congress doesn’t spend a single day debating the agreement or the implementing legislation—all unlikely. A more reasonable estimate is 90–120 days between signing the TPP and introducing its implementing legislation, and another 60–90 days before both chambers vote. Under that timeframe, an agreement could be ready for implementation between May and July 2016. But that assumes getting TPP done by July 31, 2015, which is also unlikely.</p>
<p>What is more likely is that it will take longer than one month to finalize the TPP. But how long—two months? Three? Six? That means a vote in Congress, which will be bound by the TPA timetable, could arrive on the eve of the November 2016 election. Considering how that timing could imperil the vote count, the president might decide to hold off on submitting the final TPP text so that the vote is timed for the lame-duck session.</p>
<p><strong>Conclusion</strong><br />
There have been twists and turns in the road for trade policy during the Obama administration. Expect several more in the weeks and months ahead. Although the likelihood that TPA will pass and the TPP will be completed and successfully implemented remains uncertain, it is clear that trade policy will be a ripe and contentious issue throughout the 2016 election year.</p>
<p></p>
<hr style="width: 90%;" />
<p><strong>Notes:</strong> </p>
<p>1. Because the Trade Act is legislation that would affect U.S. revenues, the bill must originate in the House of Representatives. The Senate considered and amended H.R. 1314 to include the two trade bills.<br />
2. For a more detailed analysis on this point, see Daniel J. Ikenson, “Does President Obama Support His Own Trade Agenda?” Forbes.Com, January 13, 2015.<br />
3. For a more detailed analysis on this point, see Daniel J. Ikenson, “President Obama Finally Challenges His Party’s Trade Skeptics,” Forbes.Com, April 27, 2015.<br />
4. For a more detailed analysis on this point, see Daniel J. Ikenson, “Republicans Should Welcome Trade’s ‘Burgeoning Bromance’,” Cato at Liberty (blog), May 28, 2015, <a href="http://www.cato.org/blog/republicans-should-welcome-trades-burgeoning-bromance">http://www.cato.org/blog/republicans-should-welcome-trades-burgeoning-bromance</a>.<br />
5. For a more detailed analysis on this point, see Daniel J. Ikenson, “Time for Hillary to Speak Up on Trade,” Cato at Liberty (blog), May 15, 2015, <a href="http://www.cato.org/blog/time-hillary-man-trade">http://www.cato.org/blog/time-hillary-man-trade</a>.<br />
6. Negotiating partners in TPP include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.<br />
7. For a more detailed analysis on this point, see Daniel J. Ikenson, “Should Free Traders Support Free Trade Agreements?” Cato at Liberty (blog), January 23, 2014, <a href="http://www.cato.org/blog/should-free-traders-support-free-trade-agreements">http://www.cato.org/blog/should-free-traders-support-free-trade-agreements</a>.<br />
8. Trade Adjustment Assistance was first authorized with the Trade Expansion Act of 1962.<br />
9. For an in-depth assessment of TAA, see Sallie James, “Maladjusted: The Misguided Policy of ‘Trade Adjustment Assistance’,” Cato Institute Trade Briefing Paper no. 26, November 8, 2007.<br />
10. “Tier 3” countries are those whose governments are alleged to be out of compliance with minimum standards associated with the prevention of human trafficking and are not making “significant efforts” to bring themselves into compliance.<br />
</p>
http://www.cato.org/publications/free-trade-bulletin/trade-promotion-authority-trans-pacific-partnership-what-lies-aheadMon, 08 Jun 2015 09:54 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonHow Simple Changes to Tariffs Could Help U.S. Manufacturershttp://www.cato.org/publications/commentary/how-simple-changes-tariffs-could-help-us-manufacturers
Daniel J. Ikenson
<p>The myth of decline dominates the narrative about U.S. manufacturing. Yet, the preponderance of evidence indicates that U.S. manufacturing, relative to the past and relative to other countries’ manufacturing sectors, excels by the metrics that speak to its current and future prospects. But it could be doing even better if Congress made some simple changes to the outdated U.S. tariff system.</p>
<p>According to WTO and OECD figures, intermediate goods trade may account for as much as 75% of all global trade. The proliferation of cross-border investment and transnational supply chains has blurred the distinctions between U.S. and foreign products and has rendered tariffs on imported inputs incompatible with the imperative of wooing, securing and maintaining productive, capital investment in the U.S. To compete more effectively at home and abroad, manufacturers in the U.S. need access to imported inputs at world market prices. Last year, about 55% of U.S. imports were intermediate goods and capital equipment, the purchases of U.S. producers.</p>
<p>Yet, under U.S. tariff policy, many imported inputs remain subject to import taxes. Duties on products such as magnesium, sugar, polyvinyl chloride and hot rolled steel may please domestic producers, who are freed to raise prices and reap larger profits. But they are costly to U.S. producers of auto parts, food products, paint, and appliances, who consume those products as inputs in their own manufacturing processes. These taxes chase manufactures to foreign shores, where those crucial ingredients are less expensive, and they deter others from setting up manufacturing operations stateside.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">What has been a deterrent to investment and production could be turned into a magnet for investment and production.”</span></p>
</blockquote>
<p>During the financial crisis and subsequent recession, as G-20 governments were pledging not to resort to beggar-thy-neighbor protectionism, the Canadian and Mexican governments went even further and slashed duties on imported intermediate goods. Each government properly recognized import duties as business costs and, since business revenues were projected to plunge on account of the global economic contraction, acted to limit the adverse impact on their businesses by reducing their costs through trade policy. That logic is universal, and does not only apply in times of economic recession.</p>
<p>Not only does current U.S. tariff policy elevate the interests of certain producers over others, but it tends to favor the lower-value-added, basic-materials producers to the higher-value-added, intellectual property-, capital-, and export-intensive industries, which usually contribute more to GDP and create higher-skilled jobs.</p>
<p>In 2013, U.S. Customs collected nearly $41 billion in duties, taxes and fees levied on imports, with approximately $24 billion collected on imported inputs, which amounts to nothing more than a tax on U.S. value creators. Removing that tax would encourage U.S. and foreign companies to locate or expand in the U.S. and hire more workers. What has been a deterrent to investment and production could be turned into a magnet for investment and production.</p>
<p>Establishing a policy of zero tariffs on intermediate goods would go a long way toward bolstering U.S. attractiveness as a destination for both U.S. and foreign direct investment, which will be a major determinant of manufacturing success and economic growth in the 21st century.</p>
http://www.cato.org/publications/commentary/how-simple-changes-tariffs-could-help-us-manufacturersWed, 03 Jun 2015 13:47 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonPerspectives on the Export-Import Bank of the United Stateshttp://www.cato.org/publications/testimony/perspectives-export-import-bank-united-states
Daniel J. Ikenson
<p>Chairman Shelby, Ranking Member Brown, and members of the committee, it is a great pleasure to have been invited to share my “Perspectives on the Export-Import Bank of the United States” with you today. My intention is to focus primarily on the domestic victims of the Export-Import Bank (“Ex-Im”) by describing some of the hidden costs — the collateral damage — that are often overlooked or swept under the rug.</p>
<p>To the extent that today’s hearing will help illuminate the holistic impact of Ex-Im on the U.S. economy and the market process — in contrast to the cherry-picked examples of how Ex-Im has helped particular companies meet their particular goals — I am pleased to participate and offer some assistance.</p>
<p>Before turning to that task, however, I would like to applaud the committee for taking up this important subject in a public hearing. Committed oversight of the executive branch by the legislative branch is crucial to our system of checks and balances, which must remain functionally robust to ensure the health of our constitutional republic, and protect it from even the most subtle encroachments.</p>
<p><strong>Insulated in Export Rhetoric</strong></p>
<p>Everyone loves exports. In fact, many Americans think of trade as a competition between “Us” and “Them,” where exports are Team USA’s points, imports are the foreign team’s points, the trade account is the scoreboard, and the deficit on that scoreboard means our team is losing at trade. That narrative is wrong, but certainly ripe for exploitation by agencies that portray themselves as serving some national goal of boosting exports.</p>
<p>The economic fact of the matter is that the real benefits of trade are transmitted through imports, not through exports. As Milton Friedman used to say: imports are the goods and services we get to consume without having to produce; exports are the goods and services we produce, but don’t get to consume.</p>
<p>The purpose of exchange is to enable each of us to focus on what we do best. By specializing in an occupation — instead of allocating small portions of our time to producing each of the necessities and luxuries we wish to consume — and exchanging the monetized output we produce most efficiently for the goods and services we produce less efficiently, we are able to produce and, thus, consume more output than would be the case if we didn’t specialize and trade. By extension, the larger the size of the market, the greater is the scope for specialization, exchange, and economic growth.</p>
<p>When we transact at the local supermarket or hardware store, we seek to maximize the value we obtain by getting the most for our dollars. In other words, we want to import more value from the local merchant than we wish to export. In our daily transactions, we seek to run personal trade deficits. But when it comes to trading across borders or when our individual transactions are aggregated at the national level, we forget these basics principles and assume the goal of exchange is to achieve a trade surplus. But, as Adam Smith famously observed: “What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”</p>
<p>The benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and innovation. Arguably, opening foreign markets should be <em>an aim</em> of trade policy because larger markets allow for greater specialization and economies of scale, but real free trade requires liberalization at home. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — the so-called terms of trade. Trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports.</p>
<p>Yet, in Washington, exports are associated with increased economic output and job creation, while imports are presumed to cause economic contraction and job loss. But that is demonstrably false. The first<sup>1</sup> of the two charts below plots annual changes in imports and annual changes in GDP for 44 years. If imports caused economic contraction, we would expect to see most of the observations in the upper left and lower right quadrants — depicting an inverse relationship. Instead, we see a strong positive relationship. In 43 of 44 years, imports and GDP moved in the same direction.</p>
<p><img src="http://www.cato.org/sites/cato.org/files/images/ikenson-testimony-june-2-graph-1.png" ></p>
<p>The second<sup>2</sup> chart plots annual changes in imports and U.S. employment. Similarly, there is a fairly strong positive relationship between these variables, as well.</p>
<p><img src="http://www.cato.org/sites/cato.org/files/images/ikenson-testimony-june-2-graph-2.png"</p >
<p>In keeping with the conventional Washington wisdom that exports are Team America’s points and imports are the foreign team’s points, in his January 2010 State of the Union address President Obama set a national goal of doubling U.S. exports in five years. That goal was subsequently enshrined as the “National Export Initiative,” which decreed establishment of an Export Promotion Cabinet “to develop and coordinate the implementation of the NEI.” Six months later, the new cabinet produced its recommendations in a 68-page report titled “The Export Promotion Cabinet’s Plan for Doubling U.S. Exports in Five Years,” which became the centerpiece of the administration’s trade policy agenda.</p>
<p>Most prominent in the plan was a larger role for government in promoting exports, including expanded nonmarket lending programs to finance export activity, an increase in the number of the Commerce Department’s foreign outposts to promote U.S. business, an increase in federal agency-chaperoned marketing trips, and other sundry subsidies for export-oriented business activities. Ex-Im suddenly had a more prominent role to play.</p>
<p>Shortsightedly, the NEI systemically neglected a broad swath of opportunities to facilitate exports by contemplating only the export-focused activities of exporters. The NEI presumed that the only barriers impeding U.S. exporters were foreign made. But before companies become exporters, they are producers. And as producers, they are subject to a host of domestic laws, regulations, taxes, and other policies that handicap them in their competition for sales in the U.S. market and abroad.</p>
<p>For example, nearly 60 percent of the value of U.S. imports in 2014 comprised of intermediate goods, capital goods, and other raw materials — the purchases of U.S. businesses, not consumers.<sup>3</sup> Yet, many of those imported inputs are subject to customs duties, which raise the cost of production for the U.S.-based companies that need them, making them less competitive at home and abroad. Indeed, U.S. duties on products like sugar, steel, magnesium, polyvinyl chloride, and other crucial manufacturing inputs have chased companies to foreign shores — where those crucial ingredients are less expensive — and deterred foreign companies from setting up shop stateside.<sup>4</sup></p>
<p>To nurture the promise of our highly integrated global economy, policymakers should stop conflating the interests of exporters with the national interest and commit to policies that reduce frictions throughout the supply chain — from product conception to consumption. Why should U.S. taxpayers underwrite — and U.S. policymakers promote — the interests of exporters, anyway, when the benefits of those efforts accrue, primarily, to the shareholders of the companies enjoying the subsidized marketing or matchmaking? There is no national ownership of private export revenues. And the relationship between revenues (domestic or export) and jobs is today more tenuous than in years past.</p>
<p>Globalization means that companies have growing options with respect to where and how they produce. So governments must compete for investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and administrative frictions; and so on. The crucial question for U.S. policymakers is: why not focus on reforms that make the U.S. economy a more attractive location for both domestic and foreign investment?</p>
<p>According to the Congressional Research Service, there are approximately 20 federal government agencies involved in supporting U.S. exports, either directly or indirectly. Among the nine key agencies with programs or activities directly related to export promotion are the Department of Agriculture, the Department of Commerce, the Department of State, the Department of the Treasury, the Office of the U.S. Trade Representative, the Small Business Administration, the Overseas Private Investment Corporation, the U.S. Trade and Development Agency, and the Export-Import Bank.</p>
<p>Relative to attracting domestic investment, export promotion is a circuitous and uncertain path to economic growth and job creation. If policymakers seek a more appropriate target for economic policy, it should be attracting and retaining investment, which is the seed of all economic activity, including exporting.</p>
<p><strong>Problems with Ex-Im’s Rationalizations</strong></p>
<p>The mission of the Ex-Im is “to support American jobs by facilitating the export of U.S. goods and services.” Given the exalted status of exports in Washington’s economic policy narrative, it is understandable why Ex-Im would portray itself as indispensable to U.S. export success. It’s a reasonable survival strategy. But on the metric of contribution to export success, Ex-Im is scarcely relevant. It supported $27.4 billion in exports in 2014, which is less than 2 percent of all U.S. exports last year.<sup>5</sup></p>
<p>Of course, $27 billion is nothing to sneeze at, but the implication that most, if not all, of those sales would never have happened in the absence of Ex-Im is pure nonsense. But the more important question is not whether Ex-Im supports U.S. exports. That’s the political question. The relevant economic question concerns the costs and benefits of Ex-Im to the U.S. economy.</p>
<p>Proponents limit their analyses to the impact of Ex-Im on taxpayers. In recent years, it has generated positive returns to the Treasury, but that myopic focus doesn’t come close to approximating the appropriate cost-benefit analysis.</p>
<p>While the benefits of Ex-Im’s activities are real to the recipients and visible to the public (the value of exports supported, projects financed, insurance policies underwritten are all highly touted), the costs imposed on non-beneficiaries usually go unseen by its victims — and unacknowledged by Ex-Im and its supporters. Identifying and quantifying those costs are necessary to measuring the net benefits.</p>
<p>Ex-Im supporters claim that the bank fills a void left by private sector lenders unwilling to finance certain riskier transactions and, by doing so, contributes importantly to U.S. export and job growth. Moreover, rather than burden taxpayers, the Bank generates profits for the Treasury, helps small businesses succeed abroad, encourages exports of “green” goods, contributes to development in sub-Saharan Africa, and helps “level the playing field” for U.S. companies competing in export markets with foreign companies supported by their own governments’ generous export financing programs. So what’s not to like about Ex-Im?</p>
<p>First, by dismissing the risk assessments of private-sector, profit-maximizing financial firms and making lending decisions based on nonmarket criteria to pursue often opaque, political objectives, Ex-Im misallocates resources and puts taxpayer dollars at risk. That Ex-Im is currently self-financing and generating revenues is entirely beside the point. Ex-Im’s revenue stream depends on whether foreign borrowers are willing and able to service their loans, which is a function of global economic conditions beyond the control of Ex-Im. Given the large concentration of aircraft loans in its portfolio, for example, Ex-Im is heavily exposed to the consequences of a decline in demand for air travel. Recall that Fannie Mae and Freddie Mac also showed book profits for years until the housing market suddenly crashed and taxpayers were left holding the bag.</p>
<p>Second, even if taxpayers had tolerance for such risk taking, the claim that Ex-Im exists to help small businesses is belied by the fact that most of Ex-Im’s loan portfolio value is concentrated among a handful of large U.S. companies. In 2013 roughly 75 percent of the value of Ex-Im loans, guarantees, and insurance were granted on behalf of 10 large companies, including Boeing, General Electric, Dow Chemical, Bechtel, and Caterpillar.</p>
<p>Third, the claim that U.S. exporters need assistance with financing to “level the playing field” with China and others doesn’t square with the fact that the United States is a major export credit subsidizer that has been engaged in doling out such largesse since well before the founding of the People’s Republic of China. It implies the United States is helpless at the task of reining in these subsidies. And it implies the United States lacks enormous advantages among the multitude of factors that inform the purchasing decision. But, somehow, 98 percent of U.S. export value is sold without the assistance of trade promotion agencies.</p>
<p>Fourth, and perhaps most importantly, by trying to “level the playing field” with foreign companies backed by their own governments, Ex-Im “unlevels” the playing field for many more U.S. companies competing at home and abroad. This adverse effect has been ignored, downplayed, or mischaracterized, but the collateral damage is substantial and should be a central part of the story.</p>
<p><strong>The Collateral Damage to Ex-Im’s Victims</strong></p>
<p>A proper accounting reveals that Ex-Im’s practices impose significant costs on manufacturing firms across every industry and in every U.S. state. When Ex-Im provides financing to a U.S. company’s foreign customer on terms more favorable than he can secure elsewhere, it may be facilitating a transaction that would not otherwise occur. That is the basis for Ex-Im’s claim that it helps the U.S. economy by increasing exports and “supporting” jobs. But the claim is questionable because those resources might have created more value or more jobs if deployed in the private sector instead. If that is the case, Ex-Im’s transaction imposes a net loss on the economy. But suppose it could be demonstrated that Ex-Im transactions grow the economy larger or create more jobs than if those resources had been deployed in the private sector instead. Would Ex-Im then be correct in its claim? No. Further analysis is required.</p>
<p>Ex-Im financing helps two sets of companies (in the short-run): U.S. firms whose export prices are subsidized by below market rate financing and the foreign firms who purchase those subsidized exports. It stands to reason, then, that those same transactions might impose costs on two different sets of companies: competing U.S. firms in the same industry who do not get Ex-Im backing, and U.S. firms in downstream industries, whose foreign competition is now benefitting from reduced capital costs courtesy of U.S. government subsidies. While Ex-Im financing reduces the cost of doing business for the lucky U.S. exporter and reduces the cost of capital for his foreign customer, it hurts U.S. competitors of the U.S. exporter, as well as U.S. competitors of his foreign customer by putting them at relative cost disadvantages.</p>
<p>These effects are neither theoretical nor difficult to comprehend. Yet proponents of Ex-Im reauthorization rarely acknowledge, let alone concede, that these are real costs pertinent to any legitimate net benefits calculation. Instead, they speak only of the gross benefits of export subsidies, which they consider to be the value of exports supported by their authorizations.</p>
<p>But there are at least three sets of costs that are essential to determining the net benefits of Ex-Im: (1) the “<strong>Opportunity Cost</strong>,” represented by the export growth that would have obtained had Ex-Im’s resources been deployed in the private sector; (2) the “<strong>Intra-Industry Cost</strong>,” represented by the relative cost disadvantage imposed on the other U.S. firms in the same industry (the domestic competitors) as a result of Ex-Im’s subsidies to a particular firm in the industry, and; (3) the “<strong>Downstream Industry Cost</strong>,” represented by the relative cost disadvantage imposed on the U.S. competitors of the subsidized foreign customer.</p>
<p>Opportunity Cost is difficult to estimate, but suffice it to recognize that opportunity costs exist. Indeed, opportunity costs exist whenever there are foregone alternatives to the path chosen.</p>
<p>The Intra-Industry Cost is somewhat easier to calculate, in theory. If Ex-Im provides a $50 million loan to a foreign farm equipment manufacturer to purchase steel from U.S. Steel Corporation, the transaction may benefit U.S. Steel, but it hurts competitors like Nucor, Steel Dynamics, AK Steel, and dozens of other steel firms operating in the United States and competing for the same customers at home and abroad. The $50 million subsidy to U.S. Steel is a cost to the other firms in the industry, who can attribute a $50 million revenue gap between them (aggregated) and U.S. Steel to a government intervention that picked a winner and made them, relatively speaking, losers. The $50 million “benefit” for U.S. Steel is a $50 million cost to the other steel firms.</p>
<p>But then that distortion is compounded when taking into consideration the dynamics that would have played out had the best firm — the one offering the most value for the best price — secured that export deal instead. Reaching revenue targets, raising capital, and moving down the production cost curve to generate lower unit costs all become more difficult to achieve on account of the original intervention, amplifying the adverse impact on other firms in the industry.</p>
<p>When government intervenes with subsidies that tilt the playing field in favor of a particular firm, it simultaneously penalizes the other firms in the industry and changes the competitive industry dynamics going forward. Every Ex-Im transaction touted as boosting U.S. exports creates victims within the same U.S. industry. Without Ex-Im’s intervention, Nucor might have been able to win that foreign farm equipment producer’s business, which is a prospect that undermines the premise that Ex-Im boosts exports at all and reinforces the point that it merely shifts resources around without creating value, possibly destroys value instead. What is given to U.S. steel is taken from Nucor and the other firms, among whom may be the more efficient producers.</p>
<p>The Downstream Industry costs are those imposed by the transaction on the U.S. companies that compete with the foreign customer. When a foreign farm machinery producer purchases steel on credit at subsidized interest rates, it obtains an advantage over its competitors — including its U.S. competitors. So, when that subsidized rate comes courtesy of a U.S. government program committed to increasing U.S. exports, it only seems reasonable to consider the effects on firms in downstream U.S. industries before claiming the program a success: Has the subsidy to the foreign farm machinery producer made John Deere, Caterpillar, New Holland, or other U.S. farm machinery producers less competitive? Has it hurt their bottom lines?</p>
<p>Delta Airlines has been vocal in its objection to Ex-Im-facilitated sales of Boeing jetliners to foreign carriers, such as Air India. Delta rightly complains that the U.S. government, as a matter of policy, is subsidizing Delta’s foreign competition by reducing Air India’s cost of capital. That cost reduction enables Air India to offer lower prices in its bid to compete for passengers, which has a direct impact on Delta’s bottom line. This is a legitimate concern and it is not limited to this example.</p>
<p>Consider the generic case. A U.S. supplier sells to both U.S. and foreign customers. Those customers compete in the same downstream industry in the U.S. and foreign markets. Ex-Im is happy to provide financing to facilitate the sale, as its mission is to increase exports and create jobs. The U.S. supplier is thrilled that Ex-Im is providing his foreign customer with cheap credit because it spares him from having to offer a lower price or from sweetening the deal in some other way to win the business. The foreign customer is happy to accept the advantageous financing for a variety of reasons, among which is the fact that his capital costs are now lower relative to what they would have been and relative to the costs of his competitors — including his U.S. competitors, who are now on the outside looking in. Ex-Im helps some U.S. companies increase their exports sales. But it hinders other U.S. companies’ efforts to compete at home and abroad.</p>
<p>Moreover, by subsidizing export sales, Ex-Im artificially diverts domestic supply, possibly causing U.S. prices to rise and rendering U.S. customers less important to their U.S. suppliers. Especially in industries where there are few producers, numerous customers, and limited substitute products, Ex-Im disrupts the relationships between U.S. buyers and U.S. sellers by infusing the latter with greater market power and leverage. Delta was able to connect the dots. Other companies have, too. But most of the time, the downstream U.S. companies are unwitting victims of this silent cost-shifting.</p>
<p>According to the findings in a recent Cato Institute study that I authored, the downstream costs alone amount to a tax of approximately $2.8 billion every year.<sup>6</sup> The victims of this shell game include companies in each of the 21 broad U.S. manufacturing industry classifications used by the government to compile statistics. And they are scattered across the country in every state. Among the stealthily taxed were companies such as Western Digital and Seagate Technologies — two California-based computer storage device producers that employ 125,000 workers; Chicago-based Schneider Electric Holdings, which employs 23,000 workers in the manufacture of environmental control products, and; ViaSystems, a St. Louis-based printed circuit board producer with 12,000 employees. These companies haven’t received Ex-Im subsidies, but companies in their supplier industries have, which effectively lowers the costs of their foreign competitors.</p>
<p>While it is relatively easy for a big company like Delta to connect the dots and see that Boeing is being favored at its expense (airplane purchases constitute a large share of Delta’s total costs), most manufacturing companies are unaware that they are shouldering the costs of government subsidies to their own competitors. But the victims include big and small producers — of electrical equipment, appliances, furniture, food, chemicals, computers, electronics, plastics and rubber products, paper, metal, textiles — from across the country. Companies producing telecommunications equipment incur an estimated collective tax of $125 million per year.</p>
<p>The industries in which companies bear the greatest burdens — where the costs of Ex-Im’s subsidies to foreign competitors are the highest — are of vital importance to the manufacturing economies of most states. In Oregon, Delaware, Idaho, New Jersey, Nevada, and Maryland, the 10 industries shouldering the greatest costs account for at least 80 percent of the state’s manufacturing output. The most important industry is among the ten most burdened by these costs in 33 of 50 states. The chemical industry, which bears a cost of $107 million per year, is the largest manufacturing industry in 12 states.</p>
<p>For all the praise Ex-Im heaps upon itself for its role as a costless pillar of the economy, it is difficult to make sense of the collateral damage left in its wake. Thousands of U.S. companies would be better off if Ex-Im’s charter were allowed to expire, as scheduled, on June 30.</p>
<p><strong>What to do about Foreign Export Credit Agencies?</strong></p>
<p>Of all of the arguments put forward by Ex-Im supporters, the “leveling the playing field” rationale seems to carry the most sway. It is appealing intuitively. But the implication that the United States is an innocent party that has no choice but to follow suit is laughable. The United States invented this stuff.</p>
<p>The notion that because Beijing, Brasilia, and Brussels subsidize their exporters Washington must, too, is a rationalization that sweeps under the rug the fact that there are dozens of criteria that feed into the ultimate purchasing decision, including product quality, price, producer’s reputation, local investment and employment opportunities created by the sale, warranties, after-market servicing, and the extent to which the transaction contributes toward building a long-term relationship between buyer and seller. To say that U.S. exporters need assistance with financing to “level the playing field” suggests that they lack advantages among the multitude of factors that inform the purchasing decision. Moreover, the fact that less than 2 percent of U.S. export value goes through export promotion agencies suggests this rationale for Ex-Im is bogus.</p>
<p>There is a way to bring foreign subsidies under control, however. The United States should allow Ex-Im to expire at the end of this month and then announce plans to bring cases to the World Trade Organization against governments operating their export credit agencies in violation of agreed upon limits under the Agreement on Subsidies and Countervailing Measures. The combination of the carrot of U.S. withdrawal from the business of export credit financing and the stick of WTO litigation would likely incent other governments to reduce, and possibly eliminate, their own subsidy programs.</p>
<p><strong>Conclusion</strong></p>
<p>Most of the rationales for keeping the Export-Import Bank are merely rationalizations that don’t stand up to close scrutiny. Perhaps most problematic are the costs imposed, often on unwitting victims. Ex-Im subsidies to particular exporters may help those companies succeed, but they impose significant costs on other firms in the same industry and firms in downstream industries. Accordingly, Ex-Im penalizes many smaller, dynamic, up-and-coming businesses that are often the well springs of new ideas, better mousetraps, and smarter business practices and which the economy needs to spawn subsequent generations of businesses in perpetuity. </p>
<p>That evolutionary process underlies the strength of the U.S. economy, and is essential to U.S. success going forward. On the other hand, U.S. economic strength is undermined when subsidies are deployed in a spiraling race with other nations to the detriment of the next crop of leading U.S. businesses. Let the Export-Import Bank expire.</p>
<p><strong>Notes:</strong><br>
<sup>1</sup> Data from the U.S. Bureau of Economic Analysis<sup>2</sup> Data from the U.S. Bureau of Economic Analysis and the U.S. Bureau of Labor Statistics<br><sup>3</sup> Bureau of Economic Analysis, U.S. International Trade in Goods and Services, Exhibit 6. U.S. Exports and Imports of Goods by Principal End-Use Category, February 2015, <a href="http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm">http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm</a>.<br><sup>4</sup> Daniel Ikenson, “Economic Self-Flagellation: How U.S. Antidumping Policy Subverts the National Export Initiative,” Cato Trade Policy Analysis No. 46, May 31, 2011, <a href="http://www.cato.org/publications/trade-policy-analysis/economic-selfflagellation-how-us-antidumping-policy-subverts-national-export-initiative">http://www.cato.org/publications/trade-policy-analysis/economic-selfflagellation-how-us-antidumping-policy-subverts-national-export-initiative</a>.<br><sup>5</sup> <a href="http://www.exim.gov/about/facts-about-ex-im-bank">http://www.exim.gov/about/facts-about-ex-im-bank</a>.<br><sup>6</sup> Daniel Ikenson, “The Export-Import Bank and Its Victims: Which Industries and States Bear the Brunt?” Policy Analysis No. 756, September 10, 2014, <a href="http://www.cato.org/publications/policy-analysis/export-import-bank-its-victims-which-industries-states-bear-brunt">http://www.cato.org/publications/policy-analysis/export-import-bank-its-victims-which-industries-states-bear-brunt</a>.</p>http://www.cato.org/publications/testimony/perspectives-export-import-bank-united-statesTue, 02 Jun 2015 09:31 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonRemoving Barriers to Online Medical Carehttp://www.cato.org/multimedia/events/removing-barriers-online-medical-care
Simon Lester
<p>In the United States and around the world, medical treatment has traditionally been segregated along state lines. Recently, new technology has made the provision of medical care online (telemedicine) a possibility, and consumers could benefit greatly from this development. However, state and national regulations often interfere with online medical care when it crosses borders. Can these regulations be adjusted to allow interstate and international trade?</p>
<p>What policy concerns might arise in relation to online medical services that might require continued government involvement? Are there constitutional issues at stake? For example, do government restrictions on doctors offering medical advice online constitute an abridgement of free speech? Join us for a discussion of these issues.</p>http://www.cato.org/multimedia/events/removing-barriers-online-medical-careThu, 28 May 2015 12:00 EDTLatest Cato Research on Trade PoliticsSimon LesterSimon Lester discusses the economic impact of the TPP on Huffpost Livehttp://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-economic-impact-tpp-huffpost-live
http://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-economic-impact-tpp-huffpost-liveThu, 21 May 2015 11:26 EDTLatest Cato Research on Trade PoliticsSimon LesterDonald J. Boudreaux discusses the TPP and recent trade developments on Sirius XM's Morning Briefing with Tim Farleyhttp://www.cato.org/multimedia/media-highlights-radio/donald-j-boudreaux-discusses-tpp-recent-trade-developments-sirius
http://www.cato.org/multimedia/media-highlights-radio/donald-j-boudreaux-discusses-tpp-recent-trade-developments-siriusFri, 08 May 2015 13:43 EDTLatest Cato Research on Trade PoliticsDonald J. BoudreauxFast Track or Slow Leak?http://www.cato.org/publications/commentary/fast-track-or-slow-leak
Simon Lester
<p>In the first several years of his administration, President Barack Obama was often accused of doing too little on trade policy. In an area where bipartisan initiatives seemed possible — as most Republicans support trade negotiations — and had been achieved in the past, the president seemed content to sit on the sidelines.</p>
<p>In his second term, however, Obama has turned his attention to trade and is pursuing two major trade negotiations, one with 11 nations in the Asia Pacific region (the Trans-Pacific Partnership, or TPP), and another with the European Union (the Transatlantic Trade and Investment Partnership, or TTIP). However, there are questions whether the administration is pushing too late, whether it is pushing hard enough, and whether it is pushing in the right direction. And there are also questions about whether our current trade model works. People following these issues for the first time may find the U.S. trade negotiating process complicated, confusing and convoluted. Because it is.</p>
<p>Several decades ago, a procedure was developed under which Congress would pass legislation that formally delegates trade negotiating authority to the executive branch, and in doing so, sets out specific objectives it wants the executive to pursue. As part of this arrangement, Congress promises not to amend the resulting trade deal when it is time to implement it in U.S. law. Instead, unlike normal legislation, Congress guarantees a simple yes or no vote. This special rule arose because of previous experiences where U.S. trading partners saw negotiated outcomes they had achieved amended away by Congress. This procedure was originally called “fast track,” and is now referred to as “trade promotion authority” (TPA).</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">There are questions whether the administration’s belated trade push can beat the clock.”</span></p>
</blockquote>
<p>Trade critics have pounced on this unique procedure as something unfair and undemocratic. Congress should be more than a “rubber stamp,” they say. Of course, this ignores that Congress actually votes on the final deal, and can reject it if it so chooses. The special procedure makes sense in this context. Trade legislation works differently than regular domestic legislation, because it is different: It is negotiated with other governments, rather than a purely domestic exercise.</p>
<p>To its credit, the Obama administration has, in recent months, begun to push Congress to pass TPA legislation, and Congress is close to doing so. Many trade experts believe that the TPP and TTIP cannot be concluded until TPA is passed, as our trading partners will not make their best offers until they know the final deal can be implemented properly. (Whether this is actually true is hard to say, but trade officials are operating under this assumption.) But there are questions whether the administration’s belated trade push can beat the clock. This suggestion may seem odd, given how much time Obama has left in office.</p>
<p>When presidential politics are taken into consideration, however, there is less time than one might think. As the primary campaigns heat up, more and more focus will be placed on the views of the leading contenders, and the policies they would implement when they become president. It will become increasingly hard for the current Congress to get anything done, as people may decide not to compromise in the hopes that they can do it their way when their preferred candidate takes office. As a result, if the TPP and TTIP are to be completed on Obama’s watch, things need to move fast.</p>
<p>Another concern is the extent of the administration’s efforts to promote these trade negotiations. Until recently, Obama’s approach could be seen as somewhat half-hearted. He mentioned trade occasionally, but it was clearly not his emphasis, and he did not spend much time on it. In recent weeks, however, he has taken on his liberal colleagues bluntly and directly, saying that Sen. Elizabeth Warren, D-Mass., a prominent critic, was “wrong on the facts” on this issue. If the TPP and TTIP are to come to fruition, the president must keep pushing on these issues.</p>
<p>Finally, in terms of the approach to selling the public on trade, the administration is calling the TPP the “most progressive trade agreement in history.” Obviously, the goal here is to pick up votes on the left by including progressive causes, such as minimum wage laws, in the agreement. However, this could backfire by driving away free market conservatives who do not want progressivism inserted into trade policy. In addition, the administration has focused mainly on exports as the benefit of trade agreements.</p>
<p>However, if exports are praised and imports are demonized, people get a distorted sense of the value of trade agreements. The main benefit is the increased competition and lower prices for domestic consumers. To convince people to support free trade in the long term, this argument must put front and center.</p>
<p>But this is not just about the Obama administration. The trade establishment as a whole, both Republicans and Democrats, has adopted a particular model, which will be put to the test in the coming months. Over the last two decades, trade agreements have shifted from narrowly focused efforts to rein in tariffs, quotas, subsidies and protectionist regulations, to a much broader “global governance” framework. Trade agreements now include substantive regulations on labor, the environment and intellectual property, among other things.</p>
<p>These issues have been added in response to the demands of interest groups, from both the left and the right, to generate support for these agreements. In the early years, this approach seemed to be a success, as major agreements such as NAFTA and the WTO were passed, and several bilateral free trade agreements were signed in the 2000s. But recently, as the rules have pushed boundaries further, they have led to stronger opposition.</p>
<p>The TPP and TTIP will be a test of whether this approach is still feasible. Trade agreements negotiated in the 2000s were smaller in terms of the scope of the economies the covered. The TPP and TTIP are very large, and will lead to the biggest trade debate we have seen in a long time. If the current model succeeds, the establishment’s bet will have paid off, and this model will likely guide the near future of trade policy and trade governance. If they are wrong, however, and we experience one of the largest rejections of a negotiated trade deal in history, the search will be on for a new model that can produce trade liberalization in the future.</p>
http://www.cato.org/publications/commentary/fast-track-or-slow-leakThu, 30 Apr 2015 09:15 EDTLatest Cato Research on Trade PoliticsSimon LesterEx-Im Bank Hurts Mass. Firmshttp://www.cato.org/publications/commentary/ex-im-bank-hurts-mass-firms
Daniel J. Ikenson
<p>If you count yourself among the majority of Americans fed up with the unsavory, business-as-usual, back-room dealing that continues to define Washington, D.C., take heart in the fact that the charter of the scandal-prone U.S. Export-Import Bank is set to expire on June 30. If you are among the misinformed or privileged few who support the bank’s reauthorization, how do you justify the collateral damage Ex-Im inflicts on companies in Massachusetts and across the country?</p>
<p>Ex-Im is a government-run export credit agency, which provides below market-rate financing and loan guarantees to facilitate sales between U.S. companies and foreign customers. In 2013 roughly 75 percent of Ex-Im’s subsidies were granted for the benefit of just 10 large companies — including Boeing, Bechtel, and GE — that could easily have financed those transactions without taxpayer assistance.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.”</span></p>
</blockquote>
<p>Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.</p>
<p>Ex-Im’s management and its Washington-savvy supporters have been running a shell game, dazzling Congress with the shiny new export sales it finances, while drawing policymakers’ attention away from the costs those activities impose on everyone else. Last year, Delta Air Lines finally had enough and complained about Ex-Im loans to Air India, which were granted to enable the foreign carrier to purchase aircraft from Boeing. Delta officials demonstrated how those taxpayer subsidies, made for the benefit of Boeing’s bottom line, put Delta at a competitive disadvantage by reducing Air India’s capital costs, enabling it to lower fares and compete more effectively with Delta for international travelers. Why should taxpayer dollars be used to promote the interests of one U.S. company over another?</p>
<p>Massachusetts is home to hundreds of companies in the industries that have been victimized in precisely the same manner as Delta. Massachusetts’s manufacturers of aerospace products, automobile parts, computer network equipment, electrical products, machinery, semiconductors, telecommunications equipment, and more can be counted among the victims because their <em>suppliers</em> secured Ex-Im dollars to subsidize sales to <em>foreign</em> customers. Thermo Optek Corp., a process-control instruments manufacturer with 1,150 employees in Franklin; semiconductor manufacturer Intel with 900 workers in Hudson; Schott North America in Southbridge, which employs 220 people making optical instruments and lenses; and, Nexx Systems of Billerica, which produces integrated circuits are only some examples of Massachusetts businesses that bear the costs of Ex-Im’s subsidies. There are many more.</p>
<p>According to a Cato Institute study, the five broad manufacturing sectors incurring the largest “downstream costs” from Ex-Im’s subsidies account for 27.4 percent of Massachusetts’s manufacturing economy.</p>
<p>The Export-Import Bank temporarily benefits some companies in a conspicuous manner. But it does so by quietly burdening often unwitting American companies in downstream industries. Delta and some others have cried foul. It’s time for Massachusetts’s business victims to speak up as well.</p>
http://www.cato.org/publications/commentary/ex-im-bank-hurts-mass-firmsSun, 26 Apr 2015 09:32 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonMaine Voices: Maine's Businesses Should Object to U.S. Export-Import Bank Subsidieshttp://www.cato.org/publications/commentary/maine-voices-maines-businesses-should-object-us-export-import-bank-subsidies
Daniel J. Ikenson
<p>Washington — If you count yourself among the majority of Americans fed up with the unsavory, business-as-usual, back-room dealing that continues to define Washington, take heart in the fact that the charter of the scandal-prone U.S. Export-Import Bank is set to expire June 30.</p>
<p>If you are among the misinformed or privileged few who support the bank’s reauthorization, how do you justify the collateral damage Ex-Im inflicts on companies in Maine and across the country?</p>
<p>Ex-Im is a government-run export credit agency that provides below-market-rate financing and loan guarantees to facilitate sales between U.S. companies and foreign customers. In 2013, roughly 75 percent of Ex-Im’s subsidies were granted for the benefit of just 10 large companies — including Boeing, Bechtel and GE — that could easily have financed those transactions without taxpayer assistance.</p>
<p>Supporters characterize the bank as a pillar of the economy, undergirding U.S. export sales, which allegedly create more and higher-paying U.S. jobs. But a fatty sheath of willful ignorance has insulated the bank from the scrutiny it deserves. Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">The government agency aids some at the expense of others, including some major Maine companies.”</span></p>
</blockquote>
<p>When the government subsidizes your competitor’s sales but not yours, you are made worse off because your competitor can now offer lower prices or better sales terms than he otherwise could. Call these the “intra-industry” costs.</p>
<p>Likewise, when the government subsidizes your suppliers’ sales to your competitor, you are made worse off because your competitor’s costs are artificially reduced, enabling him to charge lower prices or offer better sales terms than he could without the subsidy. Call these the “downstream” costs.</p>
<p>Ex-Im’s management and its Washington-savvy supporters have been running a shell game, dazzling Congress with the shiny new export sales it finances, while drawing policymakers’ attention away from the costs those activities impose on everyone else.</p>
<p>Last year, Delta Airlines finally had enough and complained about Ex-Im loans to Air India, which were granted to enable the foreign carrier to purchase aircraft from Boeing.</p>
<p>Delta officials demonstrated how those taxpayer subsidies, made for the benefit of Boeing’s bottom line, put Delta at a competitive disadvantage by reducing Air India’s capital costs, enabling it to lower fares and compete more effectively with Delta for international travelers. Why should taxpayer dollars be used to promote the interests of one U.S. company over another?</p>
<p>The problem isn’t limited to Delta. A recent Cato Institute study estimated the net costs imposed on firms in downstream industries on account of Ex-Im’s subsidies to firms in supplier industries to be $2.8 billion per year, and that firms in 80 percent (189 of 237) of U.S. manufacturing industries incur costs that exceed the total value of Ex-Im subsidies they may receive.</p>
<p>In other words, the average firm in four of every five manufacturing industries is made worse off by the Export-Import Bank.</p>
<p>Maine is home to hundreds of companies in the industries that have been victimized in precisely the same manner as Delta. Maine’s manufacturers of aerospace products, automobile parts, computer network equipment, electrical products, machinery, semiconductors, telecommunications equipment and more can be counted among the victims because their suppliers secured Ex-Im dollars to subsidize sales to foreign customers.</p>
<p>Toiletries manufacturer Tom’s of Maine with 165 workers in Kennebunk; the Guilford-based surgical appliance producer Puritan Medical Products, which has 470 employees; Envirologix of Portland, with 100 workers making environmental testing equipment; and printed circuit board producer Alternative Manufacturing with 70 workers in Winthrop are only some examples of Maine businesses that bear the costs of Ex-Im’s subsidies. There are many more.</p>
<p>According to the Cato Institute study, the five broad manufacturing sectors incurring the largest downstream costs from Ex-Im’s subsidies account for 27.3 percent of Maine’s manufacturing economy. Among the top 10 most heavily burdened manufacturing industries are Maine’s first, third, fourth and sixth most important manufacturing industries. Respectively, these are paper; food, beverage and tobacco; chemicals, and computers and electronics.</p>
<p>The Export-Import Bank temporarily benefits some companies in a conspicuous manner. But it does so by quietly burdening often-unwitting American companies in downstream industries. Delta and some others have cried foul. It’s time for Maine’s business victims to speak up as well.</p>
http://www.cato.org/publications/commentary/maine-voices-maines-businesses-should-object-us-export-import-bank-subsidiesSat, 25 Apr 2015 09:20 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonChinese Free Trade Is No Threat to American Free Tradehttp://www.cato.org/publications/free-trade-bulletin/chinese-free-trade-no-threat-american-free-trade
Simon Lester
<strong>Introduction</strong>
<p>As debate over the Trans Pacific Partnership (TPP) is heating up, the White House, and some commentators, have weighed in with an argument for this trade pact that has nothing to do with economics: We need the TPP, they say, because without it, China will impose its own trade rules on the region, and those rules will undermine American trade values. According to President Obama, “[W]e have to make sure the United States — and not countries like China — is the one writing this century’s rules for the world’s economy.”<sup>1</sup> Along the same lines, economist Tyler Cowen says: “[E]ither this deal happens on American terms, or an alternative deal arises on Chinese terms without our participation.”<sup>2</sup></p>
<p>This rhetoric makes it appear as though we are in the midst of a “clash of civilizations” on trade policy. Chinese mercantilism and oppression are up against American free markets and liberty.</p>
<p>The reality of how trade agreements function, and how they relate to one another, is much different. It is true that China is pursuing its own trade initiatives in the region. But China’s negotiations do not threaten American goals. A great thing about free trade is that it is something everyone can enjoy. If Chinese-led free trade helps Asian economies grow, Americans benefit, too. That becomes clear when you understand what China’s trade agreements actually do.</p>
<p><strong>China’s Trade Negotiations in the Pacific Region</strong><br />
The biggest trade pact China is negotiating is the Regional Comprehensive Economic Partnership (RCEP), which was launched in 2012.<sup>3</sup> The pact is a 16-country negotiation involving the following Pacific countries: the 10 members of the Association of Southeast Asian Nations (ASEAN), plus Australia, China, India, Japan, Korea, and New Zealand. When people suggest that an “alternative” Pacific trade deal might happen on China’s terms, this is the negotiation they have in mind. To some extent, the RCEP and the TPP have been described as competing visions of Pacific trade arrangements.<sup>4</sup></p>
<p>In reality, China’s version of a trade deal is not a threat to the TPP. For one thing, it will not be easy to complete the RCEP. Getting India, China, and 14 other countries to agree on the terms of a deal will be challenging and there is still much work to be done. As a result, there may never be an RCEP, regardless of what happens with the TPP. Furthermore, RCEP was, in part, a response to the TPP. If the TPP fails to materialize, as is possible, the motivation for the RCEP might also diminish. Thus, we are not really in a race to the finish here. At this point, there may or may not be a TPP, but the existence of the RCEP negotiations is not a reason for Americans to panic.</p>
<p>Finally, and most importantly, the Chinese approach to free trade (“Chinese terms”) is not some nefarious threat to American values. The RCEP is only in the negotiating stage, so we do not know its precise content, but it is not China’s only trade pact.<sup>5</sup> In the Pacific region, China already has trade deals with New Zealand, the ASEAN countries, and Singapore, among others, and is negotiating with Australia, Korea, and Japan. China also has trade agreements with other parts of the world, including Iceland and Switzerland. As a result, we have a good sense of what China wants in its trade agreements.</p>
<p>What all of China’s agreements do is very similar to what other trade agreements do: among other things they lower tariffs, liberalize services, and encourage the free movement of labor. As an illustration, China has a free-trade agreement (FTA) with New Zealand, and New Zealand has explained the benefits of market opening by China as follows. For trade in goods, China has committed to reducing most of its tariffs:</p>
<blockquote>
<div>
[The] FTA will result in tariffs on 96 percent of New Zealand’s current exports to China being eliminated over time. The FTA also encourages cooperation between relevant officials, regulators and technical experts to remove non-tariff barriers to trade.<sup>6</sup>
</div>
</blockquote>
<p>For trade in services, China has promised access to a number of service sectors:</p>
<blockquote>
<div>
China has also committed to provide national treatment and market access for modes 1–3 services,<sup>7</sup> going beyond its WTO [World Trade Organization] commitments, in the following sectors:
<ul>
<li>Computer and Related Services — including software implementation services, data processing services, and input preparation services</li>
<li>Services related to management consulting</li>
<li>Education (discussed in further detail below)</li>
<li>Environmental services — an improved Mode 3 (investment in environmental services) commitment permitting wholly foreign-owned enterprises</li>
<li>Sporting and other recreational services</li>
<li>Air transport services — aircraft repair and maintenance services, and air travel computer reservation services, and</li>
<li>Road Transport services — freight transportation by road in trucks or cars; maintenance and repair of motor vehicles; storage and warehousing services; and freight forwarding agency services.<sup>8</sup></li>
</ul>
</div>
</blockquote>
<p>And for movement of persons between the countries, China has agreed to allow easier travel for New Zealanders:</p>
<blockquote>
<div>
Under the FTA, New Zealanders visiting China for business purposes, including services suppliers, investors and goods sellers will benefit from faster and more transparent visa application processing.<sup>9</sup>
</div>
</blockquote>
<p>The RCEP will be no different. New Zealand’s Ministry of Foreign Affairs and Trade summarized one of the RCEP negotiating rounds this way:</p>
<blockquote>
<div>
In Trade in goods, participating countries had a constructive discussion on the modalities for the tariff negotiations, on non-tariff measures, Standards, Technical Regulations and Conformity Assessment Procedures (STRACAP), Sanitary and Phytosanitary Measures (SPS) as well as on Customs Procedures and Trade Facilitation (CPTF) and Rules of Origin (ROO).<br />
<br />
On Trade in services, participating countries discussed the structure and elements of the RCEP Services Chapter, areas of market access interests and a number of specific issues at good length… .<sup>10</sup>
</div>
</blockquote>
<p>These are the same sort of technical trade liberalizing processes that take place in trade deals not involving China.</p>
<p>Thus, while those expressing fear of China sometimes appear to be suggesting that China is promoting mercantilism in its trade pacts, that is not the case. If China and its trading partners liberalize trade in the way they are doing, that is great for them, and ultimately for Americans, too. The economic growth that results will give the United States more prosperous markets to trade with.</p>
<p><strong>Different Approaches to Trade Governance</strong><br />
Of course, there are aspects of U.S. trade agreements that do not feature in Chinese deals. One of the fears people have expressed is that China will take a different approach to certain social issues, such as labor rights and environmental protection. As Ezra Klein puts it:</p>
<blockquote>
<div>
Here’s how the White House sees it: there will either be a trade deal with America at the core of it that forces countries like Vietnam and Malaysia to live up to labor and environmental standards the Obama administration finds acceptable, or there will be a trade deal with China at the core of it that forces countries like Vietnam and Malaysia to live up to labor and environmental standards China finds acceptable. Which would you prefer?<sup>11</sup>
</div>
</blockquote>
<p>First of all, there is still a healthy debate about whether labor and environment provisions belong in trade agreements. They have the feel of lingering colonialism. The industrialized world did not enforce labor rights and environmental protections during its development period, but now wants to impose these burdens on the developing countries of today. This rubs many people the wrong way.</p>
<p>Putting that aside, what about the concern, among those who want those provisions in trade agreements, that China’s approach will undermine ours? It is hard to see how that would happen. Even though China and the United States differ on whether to use trade agreements to push social policy changes on trading partners, China’s efforts do not affect us. Our trade deal will almost certainly (based on what was in past trade deals) “force” Vietnam, Malaysia, and others to raise some of their domestic standards. China’s deal, by contrast, will probably not “force” anyone to do anything on these issues. It will most likely just not cover these standards, allowing countries to pursue whatever policies they want. If the China trade deal doesn’t force Vietnam and Malaysia to do anything on labor and the environment — as China does not really care what they do one way or the other — then they are not prohibited from complying with U.S. standards. The only possible threat here would be if Vietnam and Malaysia rejected a U.S. deal and took only China’s deal because China’s deal did not contain the labor and environment provisions. While anything is possible, that result seems highly unlikely given the desirability of access to the U.S. market.</p>
<p>Despite the way the issue is presented by some commentators, China versus America in relation to Pacific trade is not a clash of civilizations. The Economist recently suggested that “Describing regional deals as stumbling or building blocks often misses their real importance. They are also power bases. Countries use them to project their vision of free markets on to the global economy.”<sup>12</sup> Again, the implication is that Chinese mercantilism is being pitted against American open markets. But the dichotomy is overstated. Most aspects of Chinese and American trade agreements are quite similar, focusing on removing protectionist trade barriers. There are a handful of issues where the United States has added new regulatory issues to the agenda, but the U.S. “vision” is not one based on making markets as free as possible. Rather, to some extent, it is based on interest-group pressure. In trying to build a coalition of domestic support for trade agreements, the United States has inserted into trade agreements a number of domestic regulatory issues that interest groups have asked for: strong protections for labor rights, the environment, and intellectual property rights. At the margins, then, it is true that there are differences in approach, but that is based more on self-interest than on a free-market vision. Note that the United States has pushed hard for rules on state owned enterprises (SOEs), but not on rules for subsidies. It is not a coincidence that the United States has few SOEs (while China and Viet Nam have a lot), but uses subsidies a great deal.</p>
<p><strong>Trade Agreements as Tools of Foreign Policy</strong><br />
Beyond the issue of different visions for trade agreements, there are also broader foreign policy concerns related to China. As Ezra Klein notes, “TPP is central to the Obama administration’s long-heralded ‘pivot to Asia.’ … Americans need to realize that the competition with China, etc., will be about using economic policy as an effective tool of statecraft.”<sup>13</sup> The “pivot to Asia” has been a centerpiece of U.S. foreign policy, and the TPP is often talked about as being a part of it.<sup>14</sup></p>
<p>Using trade agreements for foreign policy purposes is common, but it is often misguided and can undermine economic welfare. To take one example from recent trade negotiating history, the United States has an FTA with Australia, but not with New Zealand. Why discriminate among these very similar Pacific nations, and limit the scope of trade liberalization? In this case, it was to reward Australia for its support for the Iraq war, and to punish New Zealand for not doing so.<sup>15</sup></p>
<p>In practice, then, weighing down trade negotiations with foreign policy runs the risk of having foreign policy mistakes undermine our economic policy. Trade policy matters for its own sake: the main goal is to improve economic welfare. Letting foreign policy play too big a role undercuts these economic considerations. Free trade with the Pacific region is good economic policy. The fact that it can strengthen our relationships in the region is a side benefit, of course, but should not be the guiding rationale.</p>
<p><strong>A Better Approach to Free Trade: Multilateralism</strong><br />
Ultimately, these regional trade initiatives may be a distraction from more beneficial global deals and lead to a complex “noodle bowl” of trade agreements.<sup>16</sup> The proliferation of overlapping, and possibly conflicting, trade agreements is a global problem: it is playing out in Asia through the RCEP, TPP, and various bilateral arrangements. Most economists agree that this is not what free trade should look like: it requires a trade distorting system of rules of origin that undermines the free flow of goods.<sup>17</sup></p>
<p>Regardless of what happens with TPP and RCEP, then, the United States and China should not be battling for regional trade supremacy to the extent they are doing so. Instead, they should lead the effort to promote free trade at the global level.</p>
<p>Multilateral trade talks at the WTO have struggled in recent years, but they should not be abandoned: WTO obligations are crucial to disciplining trade remedies and subsidies, areas that bilateral and regional trade agreements largely ignore. Such rules remain essential to the functioning of the trading system, and China and the United States should continue to push for a global framework that works.</p>
<p><strong>Conclusion</strong><br />
Chinese free-trade initiatives in Asia and the Pacific region should give the United States an incentive to get its own free-trade act together, but not for the reasons suggested by some. Chinese free trade is not a threat to American free trade. The justification for U.S. trade agreements is that free trade is good, not that China is somehow bad. Thus, the TPP should succeed or fail on its economic merits. The concerns about letting China write the rules are misguided. China’s trade rules are not a version of state-led capitalism. They are the removal of protectionist trade barriers, just as our trade rules are.</p>
<p><strong>Notes</strong><br />
<sup>1</sup> Tanya Somanader, “President Obama: ‘Writing the Rules for 21st Century Trade’,” The White House Blog, February 18, 2015, <a href="https://www.whitehouse.gov/blog/2015/02/18/president-obama-writing-rules-21st-century-trade" target="_blank">https://www.whitehouse.gov/blog/2015/02/18/president-obama-writing-rules-21st-century-trade</a>.<br />
<sup>2</sup> Tyler Cowen, “Why Paul Krugman Is Wrong to Oppose the Trans-Pacific Partnership,” Marginal Revolution, March 11, 2015, <a href="http://marginalrevolution.com/marginalrevolution/2015/03/why-paul-krugman-is-wrong-to-oppose-the-trans-pacific-partnership.html" target="_blank">marginalrevolution.com/marginalrevolution/2015/03/why-paul-krugman-is-wrong-to-oppose-the-trans-pacific-partnership.html</a>.<br />
<sup>3</sup> New Zealand Ministry of Foreign Affairs and Trade, “Regional Comprehensive Economic Partnership (RCEP),” <a href="http://www.mfat.govt.nz/Trade-and-Economic-Relations/2-Trade-Relationships-and-Agreements/RCEP/">www.mfat.govt.nz/Trade-and-Economic-Relations/2-Trade-Relationships-and-Agreements/RCEP/</a>.<br />
<sup>4</sup> Beginda Pakpahan, “Will RCEP Compete with the TPP?,” East Asia Forum, November 28, 2012, <a href="http://www.eastasiaforum.org/2012/11/28/will-rcep-compete-with-the-tpp/" target="_blank">http://www.eastasiaforum.org/2012/11/28/will-rcep-compete-with-the-tpp/</a>.<br />
<sup>5</sup> Ministry of Commerce of People’s Republic of China, “China FTA Network,” <a href="http://fta.mofcom.gov.cn/english/index.shtml" target="_blank">http://fta.mofcom.gov.cn/english/index.shtml</a>.<br />
<sup>6</sup> New Zealand–China Free Trade Agreement, “Frequently Asked Questions about the NZ-China FTA,” <a href="http://www.chinafta.govt.nz/5-FAQ/index.php" target="_blank">http://www.chinafta.govt.nz/5-FAQ/index.php</a>.<br />
<sup>7</sup> World Trade Organization, “GATS Training Module, Chapter 1: Basic Purpose and Concepts,” <a href="https://www.wto.org/english/tratop_e/serv_e/cbt_course_e/c1s3p1_e.htm" target="_blank">https://www.wto.org/english/tratop_e/serv_e/cbt_course_e/c1s3p1_e.htm</a>.<br />
<sup>8</sup> New Zealand–China Free Trade Agreement, “Frequently Asked Questions.”<br />
<sup>9</sup> Ibid.<br />
<sup>10</sup> New Zealand Ministry of Foreign Affairs and Trade, “Regional Comprehensive Economic Partnership (RCEP).”<br />
<sup>11</sup> Ezra Klein, “Why the Obama Administration Is Fighting for a Trade Deal its Liberal Allies Hate,” <em>Vox</em>, March 13, 2015, <a href="http://www.vox.com/2015/3/13/8208017/obama-trans-pacific-partnership">www.vox.com/2015/3/13/8208017/obama-trans-pacific-partnership</a>.<br />
<sup>12</sup> “Game of Zones,” <em>The Economist</em>, March 21, 2015, <a href="http://www.economist.com/news/finance-and-economics/21646772-regional-trade-deals-arent-good-global-ones-they-are-still?fsrc=scn/tw_ec/game_of_zones" target="_blank">http://www.economist.com/news/finance-and-economics/21646772-regional-trade-deals-arent-good-global-ones-they-are-still?fsrc=scn/tw_ec/game_of_zones</a>.<br />
<sup>13</sup> Klein, “Why the Obama Administration is Fighting for a Trade Deal its Liberal Allies Hate.”<br />
<sup>14</sup> “A Fresh Start for Pacific Trade,” <em>Wall Street Journal</em>, November 9, 2014, <a href="http://www.wsj.com/articles/a-fresh-start-for-pacific-trade-1415577301" target="_blank">www.wsj.com/articles/a-fresh-start-for-pacific-trade-1415577301</a>.<br />
<sup>15</sup> Michael Schroeder, “U.S., Australia Sign Pact Opening Trade,” <em>Wall Street Journal</em>, February 8, 2004, <a href="http://www.wsj.com/articles/SB107626322428623750" target="_blank">www.wsj.com/articles/SB107626322428623750</a>; James Brooke, “Free Trade Debate in Australia,” <em>New York Times</em>, August 5, 2004, <a href="http://www.nytimes.com/2004/08/05/business/free-trade-debate-in-australia.html" target="_blank">www.nytimes.com/2004/08/05/business/free-trade-debate-in-australia.html</a>; Andrew Stoler, “Australia-US Free Trade: Benefits and Costs of an Agreement,” in <em>Free Trade Agreements: US Strategies and Priorities</em>, ed. Jeffrey J. Schott (Washington: Institute of International Economics, 2004), p. 96, <a href="http://www.iie.com/publications/chapters_preview/375/05iie3616.pdf" target="_blank">http://www.iie.com/publications/chapters_preview/375/05iie3616.pdf</a>.<br />
<sup>16</sup> “The Noodle Bowl: Why Trade Agreements Are All the Rage in Asia,” <em>The Economist</em>, September 3, 2009, <a href="http://www.economist.com/node/14384384" target="_blank">http://www.economist.com/node/14384384</a>.<br />
<sup>17</sup> Anne O. Krueger, “Free Trade Agreements as Protectionist Devices: Rules of Origin,” Working Paper No. 4352, April, 1993, <a href="http://www.nber.org/papers/w4352.pdf" target="_blank">http://www.nber.org/papers/w4352.pdf</a>.</p>
http://www.cato.org/publications/free-trade-bulletin/chinese-free-trade-no-threat-american-free-tradeWed, 22 Apr 2015 01:21 EDTLatest Cato Research on Trade PoliticsSimon LesterHow the Ex-Im Bank Taxes Michiganhttp://www.cato.org/publications/commentary/how-ex-im-bank-taxes-michigan
Daniel J. Ikenson
<p>If you count yourself among the majority of Americans fed up with the unsavory, business-as-usual, back-room dealing that continues to define Washington, take heart in the fact that the charter of the scandal-prone U.S. Export-Import Bank is set to expire on June 30.</p>
<p>If you are among the misinformed or privileged few who support the bank’s reauthorization, how do you justify the collateral damage Ex-Im inflicts on companies in Michigan and across the country?</p>
<p>Ex-Im is a government-run export credit agency, which provides below market-rate financing and loan guarantees to facilitate sales between U.S. companies and foreign customers. In 2013, roughly 75 percent of Ex-Im’s subsidies were granted for the benefit of just 10 large companies — including Boeing, Bechtel and GE — that could easily have financed those transactions without taxpayer assistance.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.”</span></p>
</blockquote>
<p>Supporters characterize the bank as a pillar of the economy, undergirding U.S. export sales, which allegedly create more and higher-paying U.S. jobs. But a fatty sheath of willful ignorance has insulated the bank from the scrutiny it deserves. Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.</p>
<p>When the government subsidizes your competitor’s sales but not yours, you are made worse off because your competitor can now offer lower prices or better sales terms than he otherwise could. Call these the “intra-industry” costs. Likewise, when the government subsidizes your suppliers’ sales to your competitor, you are made worse off because your competitor’s costs are artificially reduced, enabling him to charge lower prices or offer better sales terms than he could without the subsidy. Call these the “downstream” costs.</p>
<p>Ex-Im’s management and its Washington-savvy supporters have been running a shell game, dazzling Congress with the shiny new export sales it finances while drawing policymakers’ attention from the costs those activities impose on everyone else. Last year, Delta Airlines finally had enough and complained about Ex-Im loans to Air India, which were granted to enable the foreign carrier to purchase aircraft from Boeing.</p>
<p>Delta officials demonstrated how those taxpayer subsidies, made for the benefit of Boeing’s bottom line, put Delta at a competitive disadvantage by reducing Air India’s capital costs, enabling it to lower fares and compete more effectively with Delta for international travelers. Why should taxpayer dollars be used to promote the interests of one U.S. company over another?</p>
<p>The problem isn’t limited to Delta. A recent Cato Institute study estimated the net costs imposed on firms in downstream industries on account of Ex-Im’s subsidies to firms in supplier industries to be $2.8 billion per year, and that firms in 80 percent (189 of 237) of U.S. manufacturing industries incur costs that exceed the total value of Ex-Im subsidies they may receive. In other words, the average firm in four of every 5 manufacturing industries is made worse off by the Export-Import Bank.</p>
<p>Michigan is home to hundreds of companies in the industries that have been victimized in precisely the same manner as Delta. Michigan’s manufacturers of aerospace products, automobile parts, computer network equipment, electrical products, machinery, semiconductors, telecommunications equipment and more can be counted among the victims because their suppliers secured Ex-Im dollars to subsidize sales to foreign customers.</p>
<p>Automotive stampings manufacturing giant Tower Automotive in Livonia; U.S. Fence, a 2,500-employee plastics molding and PVC products producer in Flint; Dearborn-based Ballard Power Systems, a manufacturer of electric motors and generator parts; Saylor-Beall Manufacturing Co., an air and gas compressors producer in Saint Johns; and, New Holland Brewing Co. of Holland are only some examples of Michigan businesses that bear the costs of Ex-Im’s subsidies. There are many more.</p>
<p>According to the Cato Institute study, the five broad manufacturing sectors incurring the largest downstream costs from Ex-Im’s subsidies account for 21.6 percent of Michigan’s manufacturing economy. Included among the top 10 most heavily burdened manufacturing industries are Michigan’s fourth, fifth, sixth and seventh most important manufacturing industries: food, beverage, and tobacco; chemicals; primary metals; and, plastics and rubber products, respectively.</p>
<p>The Export-Import Bank temporarily benefits some companies in a conspicuous manner. But it does so by quietly burdening often unwitting American companies in downstream industries. Delta and some others have cried foul. It’s time for Michigan’s business victims to speak up as well.</p>
http://www.cato.org/publications/commentary/how-ex-im-bank-taxes-michiganThu, 02 Apr 2015 09:10 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonHow U.S. Export-Import Bank Taxes Indiana's Manufacturers, Workershttp://www.cato.org/publications/commentary/how-us-export-import-bank-taxes-indianas-manufacturers-workers
Daniel J. Ikenson
<p>If you count yourself among the majority of Americans fed up with the unsavory, business-as-usual, back-room dealing that continues to define Washington, take heart in the fact that the charter of the scandal-prone U.S. Export-Import Bank is set to expire on June 30. </p>
<p>Ex-Im is a government-run export credit agency, which provides below market-rate financing and loan guarantees to facilitate sales between U.S. companies and foreign customers. In 2013 roughly 75 percent of Ex-Im’s subsidies were granted for the benefit of just 10 large companies — including Boeing, Bechtel, and GE — that could easily have financed those transactions without taxpayer assistance.</p>
<p>Supporters characterize the bank as a pillar of the economy, undergirding U.S. export sales, which allegedly create more and higher-paying U.S. jobs. But a fatty sheath of willful ignorance has insulated the bank from the scrutiny it deserves. Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">A fatty sheath of willful ignorance has insulated the bank from the scrutiny it deserves.”</span></p>
</blockquote>
<p>When the government subsidizes your competitor’s sales but not yours, you are made worse off because your competitor can now offer lower prices or better sales terms than he otherwise could. Call these the “intra-industry” costs. Likewise, when the government subsidizes your suppliers’ sales to your competitor, you are made worse off because your competitor’s costs are artificially reduced, enabling him to charge lower prices or offer better sales terms than he could without the subsidy. Call these the “downstream” costs.</p>
<p>Ex-Im’s management and its Washington-savvy supporters have been running a shell game, dazzling Congress with the shiny new export sales it finances, while drawing policymakers’ attention away from the costs those activities impose on everyone else. Last year, Delta Airlines finally had enough and complained about Ex-Im loans to Air India, which were granted to enable the foreign carrier to purchase aircraft from Boeing. Delta officials demonstrated how those taxpayer subsidies, made for the benefit of Boeing’s bottom line, put Delta at a competitive disadvantage by reducing Air India’s capital costs, enabling it to lower fares and compete more effectively with Delta for international travelers. Why should taxpayer dollars be used to promote the interests of one U.S. company over another?</p>
<p>The problem isn’t limited to Delta. A recent Cato Institute study estimated the net costs imposed on firms in downstream industries on account of Ex-Im’s subsidies to firms in supplier industries to be $2.8 billion per year, and that firms in 80 percent (189 of 237) of U.S. manufacturing industries incur costs that exceed the total value of Ex-Im subsidies they may receive. In other words, the average firm in four of every five manufacturing industries is made worse off by the Export-Import Bank.</p>
<p>Indiana is home to thousands of companies in industries victimized in precisely the same manner as Delta. Indiana’s manufacturers of aerospace products, automobile parts, computer network equipment, electrical products, machinery, semiconductors, telecommunications equipment and more can be counted among the victims because their suppliers secured Ex-Im dollars to subsidize sales to foreign customers.</p>
<p>According to the Cato Institute study, the five broad manufacturing sectors incurring the largest downstream costs from Ex-Im’s subsidies account for 39 percent of Indiana’s manufacturing economy. Included among the top 10 most heavily burdened manufacturing industries are Indiana’s first, fourth, fifth, and seventh most important manufacturing industries: chemicals; primary metals, other miscellaneous manufacturing, and food, beverage and tobacco, respectively.</p>
<p>The Export-Import Bank temporarily benefits some companies in a conspicuous manner. But it does so by quietly burdening often unwitting American companies in downstream industries. Delta and some others have cried foul. It’s time for Indiana’s business victims to speak up as well.</p>
http://www.cato.org/publications/commentary/how-us-export-import-bank-taxes-indianas-manufacturers-workersSun, 29 Mar 2015 09:24 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonEx-Im Bank Taxes Mississippi’s Manufacturershttp://www.cato.org/publications/commentary/ex-im-bank-taxes-mississippis-manufacturers
Daniel J. Ikenson
<p>If you count yourself among the majority of Americans fed up with the unsavory, business-as-usual, back-room dealing that continues to define Washington, take heart in the fact the charter of the scandal-prone U.S. Export-Import Bank is set to expire on June 30. If you are among the misinformed or privileged few who support the bank’s reauthorization, how do you justify the collateral damage Ex-Im inflicts on companies in Mississippi and across the country?</p>
<p>Ex-Im is a government-run export credit agency, which provides below market-rate financing and loan guarantees to facilitate sales between U.S. companies and foreign customers. In 2013 roughly 75 percent of Ex-Im’s subsidies were granted for the benefit of just 10 large companies — including Boeing, Bechtel and GE — that could easily have financed those transactions without taxpayer assistance.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">It’s time for Mississippi’s business victims to speak up.”</span></p>
</blockquote>
<p>Supporters characterize the bank as a pillar of the economy, undergirding U.S. export sales, which allegedly create more and higher-paying U.S. jobs. But a fatty sheath of willful ignorance has insulated the bank from the scrutiny it deserves. Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.</p>
<p>When the government subsidizes your competitor’s sales but not yours, you are made worse off because your competitor can now offer lower prices or better sales terms than he otherwise could. Call these the “intra-industry” costs. Likewise, when the government subsidizes your suppliers’ sales to your competitor, you are made worse off because your competitor’s costs are artificially reduced, enabling him to charge lower prices or offer better sales terms than he could without the subsidy. Call these the “downstream” costs.</p>
<p>Ex-Im’s management and its Washington-savvy supporters have been running a shell game, dazzling Congress with the shiny new export sales it finances, while drawing policymakers’ attention away from the costs those activities impose on everyone else. Last year, Delta Airlines finally had enough and complained about Ex-Im loans to Air India, which were granted to enable the foreign carrier to purchase aircraft from Boeing. Delta officials demonstrated how those taxpayer subsidies, made for the benefit of Boeing’s bottom line, put Delta at a competitive disadvantage by reducing Air India’s capital costs, enabling it to lower fares and compete more effectively with Delta for international travelers. Why should taxpayer dollars be used to promote the interests of one U.S. company over another?</p>
<p>The problem isn’t limited to Delta. A recent Cato Institute study estimated the net costs imposed on firms in downstream industries on account of Ex-Im’s subsidies to firms in supplier industries to be $2.8 billion per year, and that firms in 80 percent (189 of 237) of U.S. manufacturing industries incur costs that exceed the total value of Ex-Im subsidies they may receive. In other words, the average firm in four of every five manufacturing industries is made worse off by the Export-Import Bank.</p>
<p>Mississippi is home to hundreds of companies in the industries that have been victimized in precisely the same manner as Delta. Mississippi’s manufacturers of aerospace products, automobile parts, computer network equipment, electrical products, machinery, semiconductors, telecommunications equipment, and more can be counted among the victims because their suppliers secured Ex-Im dollars to subsidize sales to foreign customers. Automobile parts producer, Remy Reman, in Taylorsville; Ayrshire Electronics of Mississippi, a Corinth-based semiconductor manufacturer; BR Smith Enterprises, a producer of HVAC equipment in Union; and, wood kitchen cabinets manufacturer, Kitchen Elegance of Gulfport are just a few examples of Mississippi businesses that bear the costs of Ex-Im’s subsidies. There are many more.</p>
<p>According to the Cato Institute study, the five broad manufacturing sectors incurring the largest downstream costs from Ex-Im’s subsidies account for 34 percent of Mississippi’s manufacturing economy. Included among the top 10 most heavily burdened manufacturing industries are Mississippi’s first, fourth, sixth and seventh most important manufacturing industries: chemicals; food, beverage, and tobacco; plastics and rubber products; and, furniture and related products, respectively.</p>
<p>The Export-Import Bank temporarily benefits some companies in a conspicuous manner. But it does so by quietly burdening often unwitting American companies in downstream industries. Delta and some others have cried foul. It’s time for Mississippi’s business victims to speak up as well.</p>
http://www.cato.org/publications/commentary/ex-im-bank-taxes-mississippis-manufacturersWed, 25 Mar 2015 15:45 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonExport-Import Bank Costly to Pennsylvania Businesseshttp://www.cato.org/publications/commentary/export-import-bank-costly-pa-businesses
Daniel J. Ikenson
<p>If you count yourself among the majority of Americans fed up with the unsavory, business-as-usual, backroom dealing that continues to define Washington, take heart in the fact that the charter of the scandal-prone U.S. Export-Import Bank is set to expire on June 30.</p>
<p>If you are among the misinformed or privileged few who support the bank’s reauthorization, how do you justify the collateral damage that Ex-Im inflicts on companies in Pennsylvania and across the country?</p>
<p>Ex-Im is a government-run export credit agency that provides below-market-rate financing and loan guarantees to facilitate sales between U.S. companies and foreign customers. In 2013, roughly 75 percent of Ex-Im’s subsidies were granted for the benefit of just 10 large companies — including Boeing, Bechtel, and General Electric — that easily could have financed those transactions without taxpayer assistance.</p>
<p>Supporters characterize the bank as a pillar of the economy, undergirding U.S. export sales that allegedly create more and higher-paying U.S. jobs. But a fatty sheath of willful ignorance has insulated the bank from the scrutiny it deserves. Like all Washington subsidy programs, Ex-Im gives to the few but takes from the many.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">Like all Washington subsidy programs, Ex-Im gives to the few but takes from the many.”</span></p>
</blockquote>
<p>When the government subsidizes your competitor’s sales but not yours, you are made worse off because your competitor can now offer lower prices or better sales terms than he could have otherwise. Call these the “intra-industry” costs.</p>
<p>Likewise, when the government subsidizes your suppliers’ sales to your competitor, you are made worse off because your competitor’s costs are artificially reduced, enabling him to charge lower prices or offer better sales terms than he could without the subsidy. Call these the “downstream” costs.</p>
<p>Ex-Im’s management and its Washington-savvy supporters have been running a shell game, dazzling Congress with the shiny new export sales it finances while drawing policymakers’ attention away from the costs those activities impose on everyone else.</p>
<p>Last year, Delta Airlines finally had enough and complained about Ex-Im loans to Air India, which were granted to enable the foreign carrier to purchase aircraft from Boeing. Delta officials demonstrated how those taxpayer subsidies, made for the benefit of Boeing’s bottom line, put Delta at a competitive disadvantage by reducing Air India’s capital costs, enabling it to lower fares and compete more effectively with Delta for international travelers. Why should taxpayer dollars be used to promote the interests of one U.S. company over another?</p>
<p>The problem isn’t limited to Delta. A recent Cato Institute study estimated the net costs imposed on firms in downstream industries on account of Ex-Im subsidies to firms in supplier industries to be $2.8 billion per year. The study also showed that firms in 80 percent of U.S. manufacturing industries incur costs that exceed the total value of Ex-Im subsidies they may receive. In other words, the average firm in four of every five manufacturing industries is made worse off by the Export-Import Bank.</p>
<p>Pennsylvania is home to hundreds of companies in the industries that have been victimized in precisely the same manner as Delta. The commonwealth’s manufacturers of aerospace products, automobile parts, computer network equipment, electrical products, machinery, semiconductors, telecommunications equipment, and more can be counted among the victims because their suppliers secured Ex-Im dollars to subsidize sales to foreign customers.</p>
<p>Here are a few examples of Pennsylvania businesses that bear the costs of Ex-Im’s subsidies: Herley Industries, a search-and-navigation equipment manufacturer in Lancaster with more than 1,000 employees; Williamsport-based semiconductor manufacturer Primus Technologies, with about 470 workers; telecommunications equipment producer Compunetix, with 360 workers in Monroeville; and General Carbide Corp., a metalworking machinery manufacturer with 160 employees in Greensburg. There are many more.</p>
<p>According to the Cato study, the five broad manufacturing sectors incurring the largest downstream costs from Ex-Im’s subsidies account for 40 percent of Pennsylvania’s manufacturing economy. Included among the 10 most heavily burdened sectors are the state’s first, second, fourth, and sixth most important manufacturing industries: chemicals; food, beverage, and tobacco; primary metals; and computers and electronics, respectively.</p>
<p>The Export-Import Bank temporarily benefits some companies in a conspicuous manner. But it does so by quietly burdening often unwitting American companies in downstream industries. Delta and others have cried foul. Pennsylvania’s business victims should speak up as well.</p>
http://www.cato.org/publications/commentary/export-import-bank-costly-pa-businessesWed, 25 Mar 2015 09:32 EDTLatest Cato Research on Trade PoliticsDaniel J. IkensonGame on: How to Devise International Investment Lawhttp://www.cato.org/publications/commentary/game-how-devise-international-investment-law
Simon Lester
<p>In the ongoing, heated debate over <a href="http://csis.org/publication/investor-state-dispute-settlement" target="_blank">Investor State Dispute Settlement</a> (ISDS), the issue of international investment law is often presented as a simple binary choice. <em>Either</em> you are for an international legal system of protection of foreign investment that includes direct complaints by investors against governments, and obligations such as “fair and equitable treatment”; <em>or</em> you are against such rules and would allow foreign investors to be subject to the whims of governments. Supporters believe such international rules are crucial to attract and protect foreign investment; critics allege that the rules will undermine domestic regulation. At first glance, the debate seems unresolvable.</p>
<p>But beneath the surface of this conflict is a middle-ground position on international investment law, one that prevents many of the problems ISDS supporters warn about, while at the same time eliminating the critics’ fears of ISDS lawsuits running amok: A state-to-state dispute-settlement system, like the one used at the WTO, that focuses on a nondiscrimination obligation. Such a system would allow governments to bring complaints against other governments when anti-foreigner bias affects the treatment of foreign investors, in domestic courts, legislation or regulation.</p>
<p>This system has worked very well in the trade context. Since the WTO started in 1995, there have been almost five hundred complaints, with hundreds of panel reports, appellate reports and arbitration decisions. By almost all accounts, the system is effective. There are some difficult cases, of course, but that is true in domestic legal systems as well.</p>
<blockquote class="pullquote right">
<p class="pq-quote"><span class="open-quote">“</span><span class="pq-body">The debate on Investor State Dispute Settlement is heating up.”</span></p>
</blockquote>
<p>An obvious solution to the ISDS controversy, then, is to shift the investment law system to something more like the WTO. When this is proposed, however, the typical response is that having governments, rather than investors, bring complaints would “politicize” the process. In other words, governments would be forced to confront each other on difficult political matters, and that would be undesirable.</p>
<p>This politicization argument is not convincing. First of all, it is hard to imagine that any politicization that occurs with state-to-state dispute settlement would be worse than what is going on now with ISDS. The nature of the existing system has politicized trade agreements so much that it is questionable whether some of them can even be concluded.</p>
<p>In addition, the trade-dispute process has thrived with state-to-state dispute settlement. Disputes do get political at times, but the number of disputes filed makes clear that governments have not been deterred from asserting their rights when faced with protectionism. Moreover, it is worth noting that state-to-state dispute settlement at the WTO contains some rules on trade in services that cover investment, and the system has not been overwhelmed with politicization.</p>
<p>Rather than being a dangerous approach that would undermine foreign investment flows, state-to-state dispute settlement based on nondiscrimination would support the main goals of international investment law, without the controversies of ISDS. It will do this for two reasons.</p>
<p>First, it keeps the obligations focused on what ISDS supporters often say is their main concern: bias and prejudice against foreign companies. If a government treats an investor badly—via an expropriation without compensation, or an unfair court proceeding—because it is foreign, the system is available for the home-country government to file a complaint and rectify the situation. By focusing on nondiscrimination, the system is narrowly tailored to its goals, in contrast to the current system, where broad obligations such as “fair and equitable treatment” leave the scope uncertain and raise concerns about regulatory autonomy.</p>
<p>Second, by limiting complaints to those made by governments, as is the case in international law generally, we can take control of litigation from corporations and lawyers who pursue claims that have limited chance of success, and strain the credibility of the system. The proliferation of sometimes far-fetched claims enriches the legal industry and enrages critics, but does not do much to promote and protect foreign investment.</p>
<p>It is the combination of these two factors in the current system that is the key: The overly broad obligations, and the ability of investors to sue governments directly. If we can keep the obligations narrow, and have international investment law dispute procedures look more like traditional international law, the whole system makes a lot more sense. (And nothing in such a system would prevent foreign investors from putting arbitration clauses allowing direct lawsuits in their contracts with host governments).</p>
<p>As part of the discussion of the Trans-Pacific Partnership, the ISDS debate is heating up, with Senator Elizabeth Warren <a href="http://www.washingtonpost.com/opinions/kill-the-dispute-settlement-language-in-the-trans-pacific-partnership/2015/02/25/ec7705a2-bd1e-11e4-b274-e5209a3bc9a9_story.html" target="_blank">weighing in</a> with criticism of ISDS, and the White House offering a <a href="http://www.whitehouse.gov/blog/2015/02/26/investor-state-dispute-settlement-isds-questions-and-answers" target="_blank">public response</a>. While the debate on international investment law is playing out as a binary one—you are either with us or against us!—the reality is that it is a more nuanced and complex issue, where a compromise exists—if people are willing to look at it.</p>
http://www.cato.org/publications/commentary/game-how-devise-international-investment-lawWed, 25 Mar 2015 09:10 EDTLatest Cato Research on Trade PoliticsSimon Lester